Overview & Outlook for the Commercial P/C Insurance Industry for 2014 and Beyond Trends, Challenges & Opportunities

Overview & Outlook for the Commercial P/C Insurance

Industry for 2014 and BeyondTrends, Challenges & Opportunities

Aon Property SymposiumMiami, FL

February 4, 2014Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

3

P/C Insurance Industry Financial Overview

2013: Best Year in the Post-Crisis Era

Performance Improved with Lower CATs, Strong Markets

3

P/C Net Income After Taxes1991–2013:Q3 ($ 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% 2013:9M ROAS1 = 9.5%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.9% ROAS through 2013:Q3, 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

$14,

178

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$62,

496

$3,0

43

$35,

204

$19,

456 $3

3,52

2

$43,

029

$28,

672

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$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 13:9M

2013:9M ROAS

was 9.5%

Net income is up substantially

(+54.7%) from 2012:Q3 $27.8B

-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 1213

:Q3

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:Q3*

*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

2011: 4.7%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013:Q3 8.9%

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE

* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013:9M combined ratio including M&FG insurers is 95.8; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5100.6 100.1 100.8

92.7

101.299.5

101.0

96.6

102.4

106.5

95.7

14.3%15.9%

12.7%10.9%

7.4% 7.9%

4.7%6.2%9.6%8.8%

4.3%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:9M0%

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 ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Lower CATs are improved ROEs

in 2013

9

RNW All Lines by State, 2003-2012 Average:Highest 25 States

21.0

17.7

15.1

14.8

13.4

13.3

13.1

12.6

12.0

11.7

11.4

11.4

11.4

11.1

11.0

11.0

11.0

10.9

10.9

10.7

10.7

10.5

10.3

10.3

9.9

9.4

02468

1012141618202224

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

Source: NAIC.

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

10

9.2

9.1

8.9

8.9

8.6

8.5

8.3

8.1

7.9

7.7

7.7

7.6

7.4

6.5

6.5

6.1

6.1

5.5

5.2

4.9

4.9

4.2

3.2

2.0

-6.5

-9.4

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

10

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

RNW All Lines by State, 2003-2012 Average: Lowest 25 States

Source: NAIC.

Some of the least profitable states over the past decade were hit hard

by catastrophes

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

11

Growth Will Expand Insurer Exposure Base Across Most Lines

11

12

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 1/14; 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%4.

1%3.

2%2.

5% 2.8%

2.9%

3.0%

3.0%

3.0%

3.0%

2.9%

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%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q07

:2Q

07:3

Q07

:4Q

08:1

Q08

:2Q

08:3

Q08

:4Q

09:1

Q09

:2Q

09:3

Q09

:4Q

10:1

Q10

:2Q

10:3

Q10

:4Q

11:1

Q11

:2Q

11:3

Q11

:4Q

12:1

Q12

:2Q

12:3

Q12

:4Q

13:1

Q13

:2Q

13:3

Q13

:4Q

14:1

Q14

:2Q

14:3

Q14

:4Q

15:1

Q15

:2Q

15:3

Q15

:4Q

Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits 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%

2014/15 are expected to see a

modest acceleration in growth

13

GDP: Q4 2013 Growth by Major Component*

3.8%

-9.8%-12.6%

0.5%

11.4%

2.4%3.1% 3.3%5.9% 4.4%

2.5%

-15%

-10%

-5%

0%

5%

10%

15%

Tota

l Rea

lG

DP

Pers

onal

Cons

umpt

ion

Exp.

Dura

ble

Goo

ds

Nond

urab

leG

oods

Serv

ices

Nonr

esid

entia

lFi

xed

Inve

stm

ent

Resi

dent

ial

Fixe

dIn

vest

men

t

Fede

ral G

ovt.

Exp.

Stat

e &

Loca

lG

ovt.

Exp

Expo

rts

Impo

rts

The U.S. economy showed broad-based growth across many sectors in Q4 2013, suggesting momentum heading into 2014

Growth (%) Personal consumption accounts for 2/3 of GDP

*seasonally adjustedSource: U.S. Bureau of Economic Analysis, http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm; Insurance Information Institute.

Consumption Investment Exports/ImportsGovernment

http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

14

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

Perc

ent C

hang

e (%

)

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

15

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

Perc

ent C

hang

e (%

)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

74.4

73.6

73.6

72.2 73.6 76

67.8

68.9

68.2

67.7 71

.6 74.5

74.2 77

.567

.5 69.8 74

.371

.563

.755

.7 59.5 60.9 64

.169

.9 75.0

75.3

76.2

76.4 79

.373

.272

.3 74.3

82.6

82.7

74.5

73.8 77

.678

.6

84.5

84.1

85.1

82.1

77.5

73.2 75

.182

.581

.2

76.4

40

45

50

55

60

65

70

75

80

85

90

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Consumer Sentiment Survey (1966 = 100)

January 2010 through January 2014

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 2+ years, though

uncertainty in Washington sometimes takes a toll.Source: University of Michigan; Insurance Information Institute

Optimism among consumers dropped in Q3 2013 as the

government shutdown created uncertainty but is now

rebounding

17

Impact of 2011 budget impasse

20

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4

15.5 16

.1 16.5

16.2

16.2

16.2

16.216

.9

16.617

.117.517.8

17.4

910

11121314

151617

1819

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13E14F15F 16F17F18F 19F

(Millions of Units)

Auto/Light Truck Sales, 1999-2019F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (1/14 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

2014 and beyond

Truck purchases by contractors are especially strong

28

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1.85 1.

96 2.07

1.80

1.36

0.91

0.55 0.59 0.61

0.78 0.

921.

101.

30 1.44 1.

501.

511.

50

1.351.

461.

291.

201.

011.

19

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 (1/14 and 3/13); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” 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 should continue to stimulate new home construction

for several more years

29

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Sources: NAIC; Insurance Information Institute estimates for 2012-2014 based on CPI data and other data.

$508$536

$593

$668

$822 $830$880

$909

$978$1,017

$1,058$1,100

$804$764

$729

$400

$600

$800

$1,000

$1,200

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

Across the U.S., home insurance expenditures rose by an estimated 4.0% in 2012-2014

Annual Pct Changes

2001: 5.5%2002: 10.6%2003: 12.7%2004: 9.1%2005: 4.8%2006: 5.2%2007: 2.2%2008: 1.0%2009: 6.0%2010: 3.3%2011: 7.6%

32

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

$1.1

6$1

.18

$1.2

2

$1.4

4$1

.48

$1.4

9$1

.50

$1.4

9$1

.43

$1.3

7$1

.27

$1.2

1$1

.18

$1.1

7$1

.17

$1.1

8$1

.20

$1.2

4 $1.2

8 $1.3

5$1

.37 $1

.42

$1.4

6 $1.5

1$1

.53

$1.5

6$1

.57

$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

106

:Q2

06:Q

306

:Q4

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

;Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13: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 2/2/2014.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

http://www2.fdic.gov/qbp/

35

$200,000

$300,000

$400,000

$500,000

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

*seasonally adjusted; Nov. 2013 is preliminary; data published January 6, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Nov. 2013 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial

exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

35

The value of Manufacturing Shipments in Nov. 2013 was $494.6B—a new record high.

http://www.census.gov/manufacturing/m3/

36

Manufacturing Employment,Jan. 2010—December 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

4811

,963

11,9

7111

,988

12,0

1912

,028

11,250

11,500

11,750

12,000

12,250Ja

n-10

Feb-

10M

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-

11M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

2/30

/2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3

Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.

*Seasonally adjusted; Dec and Nov 2013 are preliminarySources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands) Since Jan 2010, manufacturing employment

is up (+550,000 or +4.6%)and still growing.

http://data.bls.gov/

37

2.5%

4.9%

6.3%

7.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2013 2014F 2015F 2016F

Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth

Accelerating business investment will be a potent driver of

commercial property and liability insurance exposures and should drive employment and WC payroll

exposures as well (with a lag)

Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.

38

Manufacturing Growth for Selected Sectors, 2013 vs. 2013*

3.0%0.0%

-3.4%

8.1%

0.2%2.7%

-1.8%-0.5%

3.1%

6.9%

1.7%3.1%

14.0%

0.4% 1.3%

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

10%12%14%16%

All

Man

ufac

turin

g

Dur

able

Mfg

.

Woo

dP

rodu

cts

Prim

ary

Met

als

Fabr

icat

edM

etal

s

Mac

hine

ry

Ele

ctric

alE

quip

.

Com

pute

rs &

Ele

ctro

nics

Tran

spor

tatio

nE

quip

.

Non

-Dur

able

Mfg

.

Food

Pro

duct

s

Pet

role

um &

Coa

l

Che

mic

al

Pla

stic

s &

Rub

ber

Text

ileP

rodu

cts

Manufacturing Is Expanding—Albeit 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 November 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: +3.4% Non-Durables: +0.2%

http://www.census.gov/manufacturing/m3/

41

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013:Q4

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

$7,250

$7,50005

: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

213

:Q3

13:Q

4

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2013:Q4) was $7.23 trillion, a new peak--$980B

above 2009 trough

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

5.3% from prior peak

Payrolls are 15.7% above

their 2009 trough and up 2.0% over

the past year

41

http://research.stlouisfed.org/fred2/series/WASCUR


50.7 52

.7 54.1

54.6

54.8

53.5

53.7

52.8 53

.9 54.6 56

57.1 59

.459

.756

.354

.453

.353

.453

.852

.652

.652

.652

.653

.056

.856

.155

.053

.754

.152

.752

.9 54.3 55

.254

.854

.8 55.7

55.2 56

.0

53.1

53.7

52.2

56.0 58

.654

.4 55.4

53.9

53.054

.4

40

45

50

55

60

65

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)January 2010 through December 2013

Non-manufacturing industries have been expanding and adding jobs. This trend is likely to continue in 2014.

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

Optimism among non-manufacturers was hurt by

the uncertainty in Washington, but remains

resilient

42

http://www.ism.ws/ismreport/nonmfgrob.cfm

43

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

7533

,212

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 13

Business Bankruptcy Filings,1980-2013

Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.

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

2013 bankruptcies totaled 33,212, down 17.1% from 2012—the fourth

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%

43

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633

http://news.uscourts.gov/

46

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)

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

47

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

47

48

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 $659.4B, up

32% from the 2010 trough but still

28% below 2006 peak

48

$261.8

$238.8

$332.1

$290.8

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

51

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

-0.2%

-13.4%

0.1%

5.9%8.6%

16.6%

1.0%

-15%

-10%

-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: +8.6% Public: -0.2%

Public sector construction activity remains depressed

http://www.census.gov/construction/c30/c30index.html

52

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

20.7%

3.0% 6.7%

-5.8%

18.3%

-10.5%

-24.2%

15.6%12.1%8.6%16.6%

1.0%

32.7%

11.5%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Tota

l Priv

ate

Cons

truct

ion

Resi

dent

ial

Tota

lNo

nres

iden

tial

Lodg

ing

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Relig

ious

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Com

mun

icat

ion

Pow

er

Man

ufac

turin

g

Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector; Bodes Well for Early 2014

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

sector construction activity is rising after plunging during the “Great Recession.”



54

$314.9 $304.0$286.4 $279.0 $275.0

$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 November.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 $39.9B or

12.7% since 2009 peak

55

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

-9.1%

0.0% 1.0% 1.0%5.2% 4.6%

-4.6%

0.1%

-0.1%-2.2%-0.2%

-13.4%

0.1%

-12.9%

-27.7%-30%-25%-20%-15%-10%

-5%0%5%

10%

Tota

l Pub

licCo

nstru

ctio

n

Resi

dent

ial

Tota

lNo

nres

iden

tial

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Publ

ic S

afet

y

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Pow

er

High

way

&St

reet

Sew

age

&W

aste

Dis

posa

l

Wat

er S

uppl

y

Cons

erva

tion

&De

velo

p.

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

Growth (%)


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


57

Surety, Net Premiums Written, 1990-2013E, ($ millions)

$2,6

10$2

,749

$2,8

81$3

,252

$3,3

32$3

,060

$3,2

88$3

,394

$3,8

36$3

,840 $4

,417

$4,8

07$4

,922

$4,8

13$4

,823

$4,8

54$4

,694

$4,6

90

$2,4

58$2

,644

$2,9

62$2

,158

$2,3

56$2

,528

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

E

Note: 1990-1992 includes Financial Guaranty.

Source: A.M. Best; Insurance Information Institute estimate for 2013 based on 9-month data from SNL Financial.

Surety premium growth has been negative/flat ever since the “Great

Recession” began

58

Surety Combined Ratio, 1990-2012*

84.1

82.7

84.2

83.8

86.7

122.

7

117.

0

122.

0

119.

5

101.

8

81.6

70.4

66.6 79

.5

70.5

72.7 76.887

.0

75.9 83

.8

84.7 91

.5

88.2

0

20

40

60

80

100

120

140

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

*Net basis.Note: 1990-1992 includes Financial Guaranty.

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

Underwriting performance in the surety line has been

strong since 2006

59

Construction Employment,Jan. 2010—December 2013*

*Seasonally adjusted; Dec and Nov 2013 are preliminarySources: 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,

799

5,79

25,

791

5,80

15,

804

5,80

55,

822

5,83

05,

849

5,83

3

5,400

5,500

5,600

5,700

5,800

5,900

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-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-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Construction employment is +398,000 above

Jan. 2011 (+7.4%) but flat in the last few months.

(Thousands)

Construction and manufacturing employment constitute 1/3 of all payroll exposure.


60

Construction Employment, Jan. 2003–December 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 2014 as the Housing Market, Private Investment and Govt. Spending 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

60

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of Dec. 2013 totaled 5.833 million, an

increase of 398,000 jobs or 7.3% from the

Jan. 2011 trough

61

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

61

62

Unemployment and Underemployment Rates: Still Too 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

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 6.7% in December 2013.

4% to 6% is “normal.”

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 13.1% in Dec. 2013.8% to 10% is

“normal.”

January 2000 through December 2013, Seasonally Adjusted (%)

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

62

As the unemployment rate approaches 6%,

the Fed will begin signaling on short-

term rates

227

5416

850

123

661

-79

2468 74 51

2-1

14-1

05-2

22-2

19 -203

-267

-269

-429

-484

-786

-701

-821

-692

-812

-821

-288

-442

-282 -2

22 -162

-233

-34

-167

-17

-26

170

102

94 103 12

911

3 188

154

114

8024

322

3 303

183

177 20

612

925

617

4 197 24

9 323

265

208

120 15

278

177

131

118

217 25

622

416

431

915

4 188

187

194

100

207

168 21

722

68711

1

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08Fe

b-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Monthly Change in Private Employment

January 2007 through December 2013 (Thousands, Seasonally Adjusted)

Private Employers Added 8.14 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

87,000 private sector jobs were

created in December

64

Jobs Created2013: 2.211 Mill2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill

http://www.bls.gov/ces/home.htm

69

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

9.1

8.8

8.6

8.4

8.3

8.1

8.0

8.0

7.8

7.6

7.4

7.4

7.4

7.3

7.2

7.1

7.0

7.0

6.9

6.9

6.9

6.7

6.6

6.6

6.4

6.4

6.2

0

2

4

6

8

10

12

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

Une

mpl

oym

ent R

ate

(%)

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

In December, 39 states and the District of Columbia had over-the-month

unemployment rate decreases, 2 states had increases, and 9 states had no

change.

70

6.2

6.2

6.2

6.2

6.1

6.1

6.0

5.9

5.9

5.7

5.7

5.4

5.2

5.2

5.1

4.9

4.6

4.5

4.4

4.2

4.2

4.1

3.6

3.6

2.6

0

2

4

6

8

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

Une

mpl

oym

ent R

ate

(%)

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

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

In December, 39 states and the District of Columbia had over-the-month unemployment rate decreases, 2

states had increases, and 9 states had no change.

71

Oil & Gas Extraction Employment,Jan. 2010—Dec. 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.

616

9.3

170.

117

1.0

172.

517

3.6

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

195.

019

6.5

197.

419

9.1

200.

120

1.9

150

160

170

180

190

200

210

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-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-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Oil and gas extraction employment is up 29.1% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in

the US.

(Thousands) Highest since Nov.

1986


$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

74

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2013E

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2013 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 2014; +8.6% Growth Estimated for 2013

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

+8.5% in 2013E


75

U.S. Insured Catastrophe Loss Update

2013 Was a Welcome Respite from the High Catastrophe Losses in Recent Years

75

76

$12.

6

$11.

0$3

.8$1

4.3

$11.

6$6

.1

$34.

7$7

.6 $16.

3$3

3.7

$73.

4

$10.

5$7

.5

$29.

2$1

1.5

$14.

4$3

3.6

$35.

0$1

2.8

$14.

0

$4.8 $8

.0

$37.

8$8

.8

$26.

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 12/31/13.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 Well

Below 2011 and 2012 YTD Totals.

2012 was the third most expensive year ever for insured CAT

losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

76

77

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*

*2010s represent 2010-2013.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 8.9

3.43.6

0.9

0.1

1.1

1.1

0.8

0123456789

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

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: 6.1E*

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

a record high in 2012

78

Top 8 States for InsuredCatastrophe Losses, 2013

$1,995

$1,509

$907 $845$773 $762

$661$593

0200400600800

1,0001,2001,4001,6001,8002,000

Oklahoma Texas Colorado Minnesota Nebraska Georgia Illinois Louisiana

Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.

$ Millions

Oklahoma let the country in insured CAT losses in 2013

As of December 31, 2013

Number of Events Fatalities

Estimated Overall Losses (US $m)

Estimated Insured Losses (US $m)

SevereThunderstorm 69 110 16,341 10,274

Winter Storm 11 43 2,935 1,895

Flood 19 23 1,929 240

Earthquake & Geophysical 6 1 Minor Minor

Tropical Cyclone 1 1 Minor Minor

Wildfire, Heat, & Drought 22 29 620 385

Totals 128 207 21,825 12,794

Natural Disaster Losses in the United States, by Type, 2013

80Source: Munich Re NatCatSERVICE 80

Num

ber

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

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

Source: MR NatCatSERVICE 82

22

19

81

6

50

100

150

200

250

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

There were 128 natural disaster events in 2013

Losses Due to Natural Disasters in the US, 1980–2013

83

Overall losses (in 2012 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions) (Overall and Insured Losses)

50

100

150

200

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

2013 CAT LossesOverall : $21.8BInsured: $12.8B

Indicates a great deal of losses are uninsured (~40%-50% in the US) =

Growth Opportunity

2013 losses were far below 2011 and 2012 and were 44% lower

than the average from 2000-2012

84

Top States by Inflation-Adjusted Insured Catastrophe Losses, 1983–2012

9.0%

10.4%

14.3%66.3%

Source: PCS unit of ISO, Verisk Company.; Insurance Information Institute.

Over the Past 30 Years Florida Has Accounted for the Largest Share of Catastrophe Losses in the U.S., Followed by Texas and Louisiana

Rest of the U.S.$309.9BFlorida

$66.7B

Texas$48.8B

Louisiana$42.0B

Total: $467.5 Billion, an average of

$16.6B per year or $1.3B per month

FL is the most costly state for

CATs, with nearly $67B in insured losses

over the past 30 years

85

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121

0.1%

1.7%

3.8%4.7%

6.3%

7.1%

36.0%

40.4%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 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, $158.2

Fires (4), $6.5

Tornadoes (2), $140.9

Winter Storms, $27.8

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.9

Other (5), $0.2

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 1993-2012

totaled $391.7B, an average of $19.6B per year or $1.6B

per month

86

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 became the 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.

87

Top 16 Most Costly World Insurance Losses, 1970-2013*


*Figures do not include federally insured flood losses.**Estimate based on PCS value of $18.75B as of 4/12/13.Sources: Munich Re; Swiss Re; Insurance Information Institute research.

$11.1$13.4 $13.4$13.4$18.8

$23.9 $24.6$25.6

$38.6

$48.7

$7.8 $8.1 $8.5 $8.7 $9.2 $9.6

$0

$10

$20

$30

$40

$50

$60

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

Charley(2004)

TyphoonMirielle(1991)

Wilma(2005)

ThailandFloods(2011)

NewZealandQuake(2011)

Ike (2008)

Sandy(2012)**

Northridge(1994)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)**

Katrina(2005)

5 of the top 14 most expensive catastrophes in

world history have occurred within the past 3 years

(2010-2012)

Hurricane Sandy is now the 6th costliest event in global

insurance history

2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, according to Swiss Re

88

Top 12 Most Costly Hurricanesin U.S. History


*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)

The current 5-year average (2008 - 2013) insured tropical cyclone loss is $5.6 billion per year.

Insured US Tropical Cyclone Losses, 1980 - 2013

Sources: Property Claims Service, Munich Re NatCatSERVICE, NFIP 89

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

NY and FL lead the US in the value of insured coastal exposure at $2.9 Trillion

92

U.S. Residual Market Exposure to Loss(1990-2012) ($ Billions)

Source: PIPSO; Insurance Information Institute (I.I.I.).

$281.8

$884.7

$757.9$818.1

$430.5$372.3

$54.7

$150.0

$292.0$244.2$221.3

$419.5

$656.7 $696.4

$771.9$703.0

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

($ Billions)

In the 23-year period between 1990 and 2012, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7

billion in 1990 to $818.1 billion in 2012.

Hurricane Andrew

4 Florida Hurricanes

Katrina, Rita and Wilma

Hurricane Sandy

Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014. 95

Geophysical events(earthquake, tsunami, volcanic activity)Meteorological events (storm)

Hydrological events(flood, mass movement)Climatological events(extreme temperature, drought, wildfire)Extraterrestrial events(Meteorite impact)

880Loss events

EarthquakeChina, 20 April

Severe storms, tornadoesUSA, 18–22 May

FloodsIndia, 14–30 June

HailstormsGermany, 27–28 July

Winter Storm Christian (St. Jude)Europe, 27–30 October

Typhoon HaiyanPhilippines, 8–12 NovemberSevere storms, tornadoes

USA, 28–31 May

Hurricanes Ingrid & ManuelMexico, 12–19 September

FloodsCanada, 19–24 June

FloodsEurope, 30 May–19 June

Heat waveIndia, April–June

Typhoon FitowChina, Japan, 5–9 October

Earthquake (series)Pakistan, 24–28 September

FloodsAustralia, 21–31 January

Meteorite impactRussian Federation, 15 FebruaryFlash floods

Canada, 8–9 July

FloodsUSA, 9–16 September

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)

Natural Loss Events:Full Year 2013

World Map

Losses Due to Natural Disasters Worldwide, 1980–2013 (Overall & Insured Losses)

97

Overall losses (in 2013 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions)(Overall and Insured Losses)

100

200

300

400

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

US$ bn

2013 LossesOverall : $125BInsured: $34B

There is a clear upward trend in both insured and overall losses over the past

30+ years

10-Yr. Avg. LossesOverall : $184BInsured: $56B

Flood Insurance

98

Flood Exposure: Reforms in Danger?• Flood Should Reflect True Risk

• Keep the Subsidies• Would Prefer to Purchase from

Private Insurers

99

Total Potential Home Value Exposure to Storm Surge Risk in 2013*($ Billions)

*Insured and uninsured property. Based on estimated property values as of April 2013.Source: Storm Surge Report 2013, CoreLogic.

$65.2$51.0$50.3

$35.0$22.4$20.5

$15.9$10.4$7.2$4.7$3.1$2.7$2.6$0.6

$65.6$72.0$78.0

$118.8$135.0

$386.5

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450

FloridaNew York

New JerseyVirginia

LouisianaS. CarolinaN. Carolina

TexasMassachusetts

ConnecticutMarylandGeorgia

DelawareMississippi

Rhode IslandAlabama

MaineNew

PennsylvaniaDC

The Value of Homes Exposed to Storm Surge was $1.147 Trillion in 2013.* Only a fraction of this is insured, hence the huge demand for federal aid

following major coastal flooding events.

Florida is by the state most vulnerable to storm surge.

100

Total NFIP Policies in Force, 2012

Source: U.S. Department of Homeland Security, Federal Emergency Management Agency; Insurance Information Institute.

Florida

Texas

Louisana

California

New Jersey

South Carolina

New York

North Carolina

Virginia

Georgia

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000

2,058,201

645,911

486,525

256,836

238,738

204,895

173,312

138,378

115,703

96,847

Florida has almost three times as much flood

insurance in force as any other state, accounting for

37% of all policies in the US

What kind of Buildings Does Flood Insurance Protect?

Other0.4%

Principal Res-idence74.5%

Secondary/ Vacation19.5%

Non-residential5.6%

102

One-fourth of all flood policies are written on commercial (non-residential) risks or on secondary homes.

Sources: Congressional Budget Office (2007), Insurance Information Institute.

Median Value of Flood Properties

$- $50,000

$100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000

$402,768

$223,692

$339,842 $306,107

All U.S. Homes;

$165,344

Med

ian

Hom

e Va

lues

, 200

6

103

A CBO survey indicated the typical home with flood insurance is worth significantly more than the typical home. The typical

subsidized coastal risk was worth more than unsubsidized risks.Congressional Budget Office 2007 survey of coastal risks, with U.S. owner-occupied home median from Bureau of Census, 2005 American Housing Survey; Insurance Information Institute.

113

I.I.I. Poll: Flood Insurance

Q. Do you think flood insurance premiums should reflect the risk of flooding no matter what the cost or do you think the government should subsidize the cost of flood insurance with taxpayers’ dollars?

Source: Insurance Information Institute Annual Pulse Survey (Nov. 2013).

Almost two-thirds of Americans think flood insurance premiums should be raised to reflect the risk of flooding.

9%

63%

28%

Don’t know

Premiums should reflect flood risk

Government should subsidize cost with taxpayers’ dollars

114


Q. The federal government provides insurance coverage at taxpayer-subsidized rates for damage from floods through the National Flood Insurance Plan. A new law eliminates the subsidy and raises rates. Do you think the rate increase should be repealed?

Source: Insurance Information Institute Annual Pulse Survey.

More than half of Americans polled for the November 2013 Pulse thought that hikes in National Flood Insurance premiums

should be repealed.

10%

55%36%

Don’t know

YesNo

It is inconsistent for the public to

support full-risk rates but maintain subsidies, but this

exactly mirrors Congressional

sentiments, with supporters of BW-12 and even Tea

Party conservatives supporting

continuation of the subsidies

115


Q. If the costs were similar, would you prefer to buy flood insurance from a private insurance company or from the federal government through the National Flood Insurance Program?

Source: Insurance Information Institute Annual Pulse Survey.

Six out of 10 Americans would prefer to buy flood insurance from a private insurance company as opposed to the federal government, if

costs were similar.

10%

64%

26%

Don’t know

Private insurance company

The federal government

through the NFIP

116

Federal Disaster Declarations Patterns:

1953-2013

116

Disaster Declarations Set New Records in Recent Years

Number of Federal Major Disaster Declarations, 1953-2014*

1317 18 16 16

7 712 12

22 2025 25

11 1119

2917 17

48 46 4638

3022 25

4223

1524 21

3427 28

2311

3138

4532

3632

7544

6550

45 4549

5669

4852

6375

5981

9947

556

43

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 14

*Through February 2, 2014.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 Before Dropping 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 2,150 federal disaster

declarations since 1953. The average

number of declarations per year is 35 from 1953-2013, though

there few haven’t been recorded since 1995.

6 federal disasters were declared so far in 2014*

117

http://www.fema.gov/disasters

118

Federal Disasters Declarations by State, 1953 – 2014: Highest 25 States*

88

79

75

67 66

60 57 56 55 55 53 52 52 51 51 50 50 49 48 47 47 46 44 43 40

0102030405060708090

100

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

Dis

aste

r Dec

lara

tions

Over the past 60 years, Texas has had the highest

number of Federal Disaster

Declarations

*Through Feb. 2, 2014. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

http://www.fema.gov/news/disaster_totals_annual.fema

119

Federal Disasters Declarations by State, 1953 – 2014: Lowest 25 States*

42

40 39

37 37 36 35

33

29 28

26 26 26 26

24 24 23 23 22

1917

15 15

1311 11

9

0

10

20

30

40

50

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

Dis

aste

r Dec

lara

tions

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

number of Federal Disaster Declarations

*Through Feb. 2, 2014. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

http://www.fema.gov/news/disaster_totals_annual.fema

120

SEVERE WEATHER REPORT UPDATE: 2013

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

120

Location of Tornado Reports in 2013

121Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html#; PCS.

There were 943 tornadoes

through Dec. 31, causing

extensive property

damage in several states

A deadly EF-5 tornado in May in

Moore, OK, produced insured losses of $1.575

billion. November tornadoes in the

Midwest like produced $1B in insured losses.

http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html


U.S. Tornado Count, 2005-2013*

122*Through Dec. 31, 2013.Source: http://www.spc.noaa.gov/wcm/.

There were 1,897 tornadoes in the U.S. in 2011 far

above average, but well below 2008’s record

2013 count was the

lowest in a decade

http://www.spc.noaa.gov/wcm/

http://www.spc.noaa.gov/wcm/

http://www.spc.noaa.gov/wcm/torngraph-big.png



U.S. Thunderstorm Insured Loss Trends, 1980 – 2013

123Source: Property Claims Service, and MR NatCatSERVICE

Thunderstorm losses in 2013 totaled $10.3 billion, the 6th

highest on record

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. 2008-2013 are the most expensive

years on record.

Location of Large Hail Reports: 2013

127Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html#

There were 5,457 “Large

Hail” reports in 2013, causing

extensive property and

vehicle damage




Location of High Wind Reports: 2013


There were 12,942 “Wind Damage” in

2013, causing extensive property damage




Severe Weather Reports: 2013


Severe weather reports are

concentrated east of the Rockies

There were 19,342 severe

weather reports in 2013;

including 942 tornadoes;

5,457 “Large Hail” reports

and 12,942 high wind events




Terrorism Update

130

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

130

http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html

http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html

135

Terrorism Risk Insurance Program Testified before Senate Banking Cmte. in Sept. 2013 Testified before House Financial Services Nov. 2013 Provided testimony at NYC hearing on June 2013 I.I.I. Accelerated Planned Study on Terrorism Risk and

Insurance in the Wake of Boston and Hearings; Was Well Received and Widely Circulated

Working with Trades, Congressional Staff, GAO & Others

Senate Banking Committee, 9/25/13House Financial Services Subcommittee, 11/13/13

136

TRIA Outlook 3 TRIA Reauthorization Bills Introduced in 2013 Bumpy Road to Reauthorization Ahead

Senate: Generally supportive based on 9/25 hearing House: Democrats supportive; Republicans skeptical but some

seem willing to support reauthorization based on 11/13 hearing– Analogies to Affordable Care Act often mentioned by Republicans

House Committee Proposals Likely to Involve: Increase in trigger (from current $100 million) Increasing individual comp. retentions (from current 20% of DPE) Also possible: Simple industry aggregate or NBCR only proposal

I.I.I.: Success of Current Structure & Taxpayer Protections Also Focused on Importance of Small/Medium Insurers Limitations of Capacity in the Absence of TRIA Media in 2014 Wants Stories of Economic Disruption

143

Growth Analysis by State and Business Segment

Premium Growth Rates Vary Tremendously by State

143

144

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

Pece

nt c

hang

e (%

)

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%

145

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

Pece

nt c

hang

e (%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 13 states and DC between

2007 and 2012

149

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

05

1015202530354045

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

Pece

nt c

hang

e (%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

150

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

05

10152025303540

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

Pece

nt c

hang

e (%

)

Bottom 25 States


151

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

Pece

nt c

hang

e (%

)


Top 25 States

Only 16 states showed any commercial lines growth

2007 and 2012

152

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

Pece

nt c

hang

e (%

)

Bottom 25 States


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

the past 5 years

The BIG Question:Where Is the Market Heading?

159

Catastrophes and Other Factors Are Pressuring Insurance Markets

159

New Factor: Record Low Interest Rates Are Contributing to

Underwriting and Pricing Pressures

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$45.8

$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 9M:2013 investment income of $34.338B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

164

-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%

Persona

l Line

s

Pvt Pass

Auto

Pers P

rop

Commerc

ial

Comml A

uto

Credit

Comm P

rop

Comm C

as

Fidelity

/Sure

ty

Warra

nty

Surplus

Line

s

Med M

al

WC

Reinsu

rance

**

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*

164

166

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

*Monthly, constant maturity, nominal rates, through December 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

166

http://www.federalreserve.gov/releases/h15/data.htm

1. UNDERWRITING

171

Underwriting Losses in 2011 and 2012 Are Elevated by High

Catastrophe Losses171

172

P/C Insurance Industry Combined Ratio, 2001–2013:Q3*

* 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; 2013:Q3 = 95.8. Sources: A.M. Best, ISO.

95.799.3

100.8

106.3

102.4

96.6

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

Sandy Impacts

Lower CAT

Losses

175

Combined Ratios by Predominant Business Segment, 2013:9M vs. 2012:9M*

*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute

99.8 99.3 98.8

102.7

96.697.6

93.3

99.2

90

92

94

96

98

100

102

104

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2012:9M 2013:9M

(Percent)The combined ratios for

both personal and commercial lines

improved substantially through 2013:Q3

176

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

$3092 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

13E

14E

15E

Prio

r Yr.

Res

erve

Rel

ease

($B

)

-6

-4

-2

0

2

4

6

8 Impact on C

ombined R

atio (Points)

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).

190

Performance by Segment

190

Homeowners Insurance Combined Ratio: 1990–2015F

113.

011

7.7

158.

411

3.6

101.

0 109.

410

8.2

111.

4 121.

710

9.3

98.2

94.4 10

0.3

89.0 95

.611

6.6

105.

810

6.9

122.

310

4.1

94.0 97

.599

.5

118.

411

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

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 15F

1

Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to

Local Catastrophe Loss Activity

192

Hurricane Ike

Hurricane Sandy

Record tornado activity

Hurricane Andrew

Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.

109.

411

0.2

118.

810

9.5 11

2.5

110.

2

107.

610

4.1

109.

7

110.

2

102.

5 105.

4

91.1 93

.6

104.

298

.9

102.

410

7.9

103.

498

.3 99.9

98.910

2.0

111.

1

112.

3

122.

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 13F

14F

15F

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2014F); Conning (2015F) Insurance Information Institute.

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

193

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

104.

1

101.

4

103.

0

103.

9107.

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. 196

Workers Compensation Combined Ratio: 1994–2014F

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5 10

3.5

104.

5 110.

6 115.

0

115.

0

109.

0

104.

0

103.

5

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 13E 14F

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 (2013E-

2014F). 201

WC results are improving steadily

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 CPIChange 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.

2. SURPLUS/CAPITAL/CAPACITY

216

2013 Recorded Yet Another Record High

216

217

Policyholder Surplus, 2006:Q4–2013: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

$567.8$583.5$586.9

$607.7$614.0$624.4

$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

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

2007:Q3Pre-Crisis Peak

Surplus as of 9/30/13 stood at a record high $624.4B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.78 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 entered 2014in very strong financial condition.

220

3. REINSURANCE MARKET CONDITIONS

Ample Capacity as Alternative Capital is

Transforming the Market

220

221

Global Reinsurer Capital, 2007-2013:H1*

$510

$410

$340$400

$470 $455$505

$0

$100

$200

$300

$400

$500

$600

2007 2008 2009 2010 2011 2012 2013:H1

*Includes both traditional and non-traditional forms of reinsurance capital.Source: Aon Benfield Aggregate study for the 6 months ending June 2013; Insurance Information Institute.

($ Billions)

Global Reinsurance Capital Has Been Trending Generally Upward Since the Global Financial Crisis, a Trend that Seems Likely to Continue

-17%+18%

+18% -3%+11% +1%

Catastrophe Bonds: Issuance and Outstanding, 1997- 2013*Risk Capital Amount ($ Millions)

*Through Dec. 31, 2013.Source: Guy Carpenter; Insurance Information Institute.

633.

0

846.

1

984.

8

1,13

0.0

966.

9 2,72

9.2

3,39

1.7

4,60

0.3

4,10

8.8

5,85

2.9

7,08

3.0

1,991.11,142.8

1,729.8

6,99

6.3

4,69

3.4

1,219.5

$3,4

50.0

$4,0

40.4

$4,9

04.2 $8

,541

.6

$14,

024.

2

$12,

043.

6

$12,

508.

8

$12,

185.

0

$12,

139.

1

$14,

835.

7

$18,

576.

9

$2,9

50.0

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13Risk Capital IssuedRisk Capital Outstandng at Year End

Catastrophe Bond Issuance and Risk Capital Outstanding Reached All-Time Record Highs in 2013

CAT bond issuance reached a record $7.1B in 2013

Risk capital outstanding

reached a record high $18.6B in 2013

Financial crisis depressed issuance

4. RENEWED PRICING DISCIPLINE

227

Evidence of a Broad and Sustained Shift in Pricing

227

228

-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

:9M

Net Premium Growth: Annual Change, 1971—2013:Q3(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.

2013:9M = 4.2%

2012 growth was +4.3%

231

Growth in Net Written Premium by Segment, 2013:9M vs. 2012:9M*

*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute

4.1%

5.3%

2.9%

4.0%4.2%

3.1%

5.8%

4.2%

0%

1%

2%

3%

4%

5%

6%

7%

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2012:9M 2013:9M

(Percent)

232

Average Commercial Rate Change,All Lines, (1Q:2004–3Q: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%-1

1.8%

-13.

3%-1

2.0%

-13.

5%-1

2.9% -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%

3.4%

-0.1

% 0.9%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

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 Q3:2013 was positive for the 9th consecutive

quarter. Gains are likely to continue into 2014.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

233

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q3

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


Percentage Change (%)Peak = 2001:Q4

+28.5%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

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

nearly 8 years; Q3:2013 renewals were up 3.4%. Some insurers posted

stronger numbers.

Trough = 2007:Q3 -13.6%

KRW : No Lasting Impact

237

Change in Commercial Rate Renewals, by Line: 2013:Q3

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

Major Commercial Lines Renewed Uniformly Upward in Q3:2013 for the 9th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

3.5%

4.7%5.4%

5.8%

1.0%

2.9% 2.7% 2.9% 2.9%3.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Sur

ety

Con

stru

ctio

n

Bus

ines

sIn

terru

ptio

n

Um

brel

la

Gen

eral

Liab

ility

Com

mer

cial

Aut

o

Com

mer

cial

Pro

perty D&

O

EP

L

Wor

kers

Com

p

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

by Property lines


Shifting Legal Liability & Tort Environment

240

Is the Tort PendulumSwinging Against Insurers?

240

241

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

Tort

Syst

em C

osts

1.50%

1.75%

2.00%

2.25%

2.50%

Tort Costs as %

of 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

245

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

CYBER RISK

246

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large

and Small in Every IndustryNEW III White Paper:

http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf

246

http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf

Data Breaches 2005-2013, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619662

87.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013*020406080100120140160180200220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared

Millions

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Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations

Insurance Information Institute Online:

260

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Documents

Overview & Outlook for the Commercial P/C Insurance Industry for 2014 and Beyond Trends, Challenges & Opportunities