Overview & Outlook for the P/C Insurance Industry

Challenges and Opportunities for 2011 and Beyond

PCI Joint Underwriting and Marketing SeminarLas Vegas, NVApril 5, 2011

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

Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Presentation Outline

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry P/C Profitability Overview & Outlook The Elusive Market Turn: When, Why, How and IF

Pricing: Up, Down or Sideways? Underwriting Trends: Drivers of Future Market Firming? Investments: New Investment Reality Not Reflected in Pricing Expenses: Cyclical Increase Leverage/Capital Management: Excess Capacity and Squeezing it Out

M&A Activity in the P/C Insurance Industry External Factors Influencing Profitability

Tort System Review: Overview and Causes for Concern Inflation

Growth in the Aftermath of the Great Recession Crisis-Driven Exposure Issues: Commercial Lines

Global Issues Impacting P/C Insurance Catastrophe Loss Review Social Media Strategy Q&A

3

Reasons for Optimism, Causes for Concern in the P/C

Insurance Industry

The Outlook for the Economy Has Brightened, But the Outlook

for P/C Insurance Is Mixed

4

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

Economic Recovery in US is Self-Sustaining and Strengthening No Double Dip or Second Recession Economy is more resilient than most pundits presume

Consumer Confidence is Gradually Improving Consumer Spending is Recovering Gradually Consumer and Business Lending Are Expanding Housing Market Remains Weak, but Some Improvement Expected in 2011 Inflation Remains Tame

Runaway inflation is highly unlikely; Fed has things under control Deflation—threat has disappeared

Private Sector Hiring is Consistently Positive for 14 Months Acceleration in hiring later in 2011 compared to 2010 No significant secondary spike in unemployment

Japan Threat to Global Economy Overstated Sovereign Debt, Muni Bond “Crises” Overblown Current Middle East Turmoil Poses Only Moderate Risk to US Economy Interest Rates Are Rising but Remain Low by Historical Standards Stock and Bond Markets More Stable, Less Volatile Political Environment Is More Hospitable to Business Interests

5

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

Era of Mass P/C Insurance Exposure Destruction Has Ended Personal and commercial exposure growth is virtually certain in 2011

But restoration of destroyed exposure will take 3-5 years in US

Exposure Growth Returned in in 2nd Half 2010, Will Accelerate in 2011

P/C Industry Saw Growth in 2010 (+0.8%) for the First Time Since 2006

Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures Wage growth is also positive and could modestly accelerate

Increase in Demand for Commercial Insurance Is in its Earliest Stages and Will Accelerate in 2011 Includes workers comp, commercial auto, marine, many liability coverages, D&O

Laggards: Property, inland marine, aviation

Personal Lines: Auto leads, homeowners lags

Investment Environment Is/Remains Much More Favorable Return of realized capital gains as a profit driver

Interest rates are low but are risingBoost to investment income

Agent Commissions Should Begin to Rise in 2011

Demand, Capital Management Strategies Will Temper Overcapitalization

8

Summary of Japan Earthquake

The March 11 Quake is Just the Most Recent of Several Large

Catastrophe Losses

9

Location of March 11, 2011 Earthquake Near Sendai, Honshu, Japan

Source: US Geological Service; Insurance Information Institute.

Magnitude 9.0 earthquake struck Japan at 2:46PM local time (2:46AM Eastern) off the northeast cost of Honshu, 80 miles east of the city of Sendai

Quake is among the 5 strongest in recorded history and the strongest in the 140 years for which records have been kept in Japan

11,000+ fatalities

Economic loss: $100 - $300 bn

Insured losses up to $35 bn

Significant tsunami damage was recorded in Japan; relatively minor damage on the U.S. West Coast

March 11 Earthquake Factsas of 3/24/2011

LOCATION130 km (80 miles) E of Sendai, Honshu, Japan178 km (110 miles) E of Yamagata, Honshu, Japan178 km (110 miles) ENE of Fukushima, Honshu, Japan373 km (231 miles) NE of TOKYO, Japan

Insured Japan Earthquake Loss Estimates*

$- $5 $10 $15 $20 $25 $30 $35 $40

RMS

AIR Worldwide

Eqecat $12 - $25 bn

$25 - $35 bn

10

*As of March 29, 2011. Figures do not include insured tsunami losses.Sources: AIR Worldwide, Eqecat; Insurance Information Institute.

(Insured Losses, $ Billions)

Economic losses are likely to total in the $200 billion range, meaning only a fraction of the

loss is insured

11

Top 20 Nonlife Insurance Companies in Japan by DPW, 2008

Direct premiums written, 2008

Rank Companies JPY (millions)

U.S. ($ millions)

Marketshare

Cumulative Market Share

1 Tokio & Marine Nichido $2,032,131.2 $19,660.9 24.0% 24.0%

2 Sompo Japan 1,504,262.7 14,553.8 17.8 41.8%

3 Mitsui Sumitomo 1,455,161.8 14,078.7 17.2 59.0%

4 Aioi 897,182.6 8,680.3 10.6 69.6%

5 Nipponkoa 728,262.9 7,046.0 8.6 78.2%

6 Nisay Dowa 361,530.7 3,497.8 4.3 82.5%

7 Fuji 329,345.7 3,186.4 3.9 86.4%

8 AIU 253,522.8 2,452.8 3.0 89.4%

9 Kyoei 199,393.1 1,929.1 2.4 91.8%

10 Nisshin 149,735.8 1,448.7 1.8 93.6%

11 American Home 82,889.8 802.0 1.0 94.6%

12 Asahi 73,600.1 712.1 0.9 95.5%

13 Sony 60,868.3 588.9 0.7 96.2%

14 ACE 54,876.2 530.9 0.7 96.9%

15 Zurich 45,471.3 439.9 0.5 97.4%

16 SECOM 44,245.0 428.1 0.5 97.9%

17 Sumi Sei 33,594.0 325.0 0.4 98.3%

18 AXA 30,418.9 294.3 0.4 98.7%

19 Mitsui Direct 29,471.9 285.1 0.4 99.1%

20 Daido 15,690.4 151.8 0.2 99.3%

Source: © AXCO 2011.

12

Recent Major Catastrophe Losses

(Insured Losses, $US Billions)

*Midpoint of AIR Worldwide estimated insured loss range of $15 billion to $35 billion as of March 13, 2011. Does not include tsunami losses.Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.

$25.0

$10.0$8.0

$5.0$2.0

$0.5$0

$5

$10

$15

$20

$25

$30

Cyclone Yasi(Australia) Feb

2011

Australia Floods(Dec - Feb 2011)

New ZealandQuake (Sep 2010)

Chile Earthquake(Feb 2010)

New ZealandQuake (Feb 2011)

Japan Earthquake(Mar 2011)*

Insured Losses from Recent Major Catastrophe Events Exceed $50 Billion, an Estimated $48 Billion of that from Earthquakes

The March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current

leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars)

13

Nonlife Insurance Market Impacts of Japan Earthquake Primary Insurance: Downgrades of Some Domestic Japanese Insurers Significant Absorption of Loss by Japanese Government

Residential earthquake damage Nuclear-related property and liability damage

Market Share of Foreign Primary Insurers in Japan is Small Not a capital event for any non-Japanese primary insurer

Significant Impacts for Global Reinsurers Property-Catastrophe covers on Commercial Lines Business Interruption Contingent Business Interruption

Currently an Earnings Event for Global Reinsurers Not a capital event: Global reinsurance markets entered 2011 with record capital

Cost of Property/Catastrophe Reinsurance Rising in Japan, New Zealand, Australia Up for all; Magnitude of increase is sensitive to size of loss

Reinsurance Coverage Remains Available in Affected Regions Little (If Any) Impact of Cost of US Property-Cat Reinsurance

Market remains well capitalized and competitive Elevated global cat activity could halt price declines for property/cat reinsurance

14

P/C Insurance Industry Financial Overview

Profit Recovery ContinuesEarly Stage Growth Begins

P/C Net Income After Taxes1991–2010E ($ Millions)

$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

4,8

93

$2

8,3

11

-$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 10E

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:Q3 ROAS = 6.7%

P-C Industry 2010:Q3 profits were$26.7B vs.$16.4B in 2009:Q3,

due mainly to $4.4B in realized capital gains vs. -$9.6B in previous

realized capital losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS for 2010:Q3 and 4.6% for 2009. 2009:Q3 net income was $29.8 billion excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

16

ROE: Property/Casualty Insurance,1987–2010E*

* Excludes Mortgage & Financial Guarantee in 2008 - 2010.Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E

P/C Profitability Is Both by Cyclicality and Ordinary Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

17

ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2010:H1*

* Return on average surplus in 2008-2010 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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

ROE Cost of Capital

-13

.2 p

ts +1

.7 p

ts

+2

.3 p

ts

-9.0

pts

-6.4

pts

-3.2

pts

The P/C Insurance Industry Fell WellShort of Its Cost of Capital in 2008 but

Narrowed the Gap in 2009 and 2010

US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from

1991 to 2002, but on Target or Better 2003-07, Fell Short in 2008-2010

The Cost of Capital is the Rate of Return Insurers Need to

Attract and Retain Capital to the Business

(Percent)

-2.7

pts

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

Combined Ratio / ROE

* 2009 and 2010:Q3 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.5 99.7101.0

7.7%7.3%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010:Q3*0%

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 generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

RNW for Major P/C Lines,2000-2009 Average

19.1%

8.5% 8.0% 7.4% 7.0% 6.4%4.7% 4.7%

-3.9%

19.8%

12.2%

7.2%

-5%

0%

5%

10%

15%

20%

Fire InlandMarine

AllOther

CommAuto

CMP MedMal

PPAuto

AllLines

WC OtherLiab

HO Allied

Source: NAIC; Insurance Information Institute

10-year returns for some lines are excellent, though homeowners is a major

laggard, largely due to major catastrophes. WC returns are slipping.

20

The Elusive Market Turn

When, Why, How andIF

PREMIUM TRENDS

21

Winds of Change or Moving Sideways?

22

-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 0910

E11

F

Soft Market Persisted in 2010 but May Be Easing: Relief in 2011?

(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.

NWP was up 0.5% in 2010 (est.) with forecast growth of 1.4% in 2011

23

Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2010E

14.5%

3.0%

-0.9%0.9%

9.2%

6.0%

2.2%

5.7%

0.5%

-4.9%

15.3%

5.0%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

00 01 02 03 04 05 06 07 08 09 10E

Private Passenger AutoHomeownersAll Lines

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

Average 2000-2009Auto = 2.9

Home = 6.5%All Lines = 3.4%

While homeowners insurance has grown faster than auto over the past decade, auto is

generally more profitable

24

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

Sources: ISO, Insurance Information Institute.

Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)

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% 3.0%

-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

The long-awaited uptick:

mainly personal lines

25

Net Written Premium Growth by Segment: 2008-2011F

-0.1%

-9.4%

2.8%

-2.0%

2.5%

0.3%

-3.1%

-0.1%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Personal Lines Commercial Lines

2008 2009E 2010P 2011F

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession

weigh on commercial lines.

Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted

again in 2010 and but will stabilize in 2011

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

26

Monthly Change* in Auto Insurance Prices, 1991–2011*

*Percentage change from same month in prior year; through February 2011; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

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

Cyclical peaks in PP Auto tend to occur

approximately every 10 years (early 1990s, early

2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

A pricing peak may be occurring

Feb. 2011 change

was 4.2%, down from

5.4% in Nov. 2010

27

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.

$508$536

$593

$668

$822$791 $799 $807$804

$764

$729

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

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

Consumer efforts to economize (increased deductibles, more shopping, etc.) and

adverse exposure trends are depressing the average homeowners insurance premium

28

Average Commercial Rate Change,All Lines, (1Q:2004–3Q:2010)

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

%

-2.7

%

-3.0

%

-5.3

%

-9.6

%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-6.4

% -5.2

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

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

KRW Effect

Magnitude of Price Declines Shrank

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

Performance, Higher Cat Losses and

Costlier Reinsurance

(Percent)

Market Remains Soft as Capital Restored and

Underwriting Losses Remain Modest

29

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q3

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

Percentage Change (%)

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since KRW Effect

Market has Been Soft for 6+ years and Remains Soft as Capital is Restored and

Underwriting Losses Remain Modest

30

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q3

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

1999:Q4 = 100

Pricing today is where is was in

Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for

larger risks

UNDERWRITING

32

Cyclicality is Driven Primarily by the Industry’s Underwriting

Cycle, Not the Economy

33

P/C Insurance Industry Combined Ratio, 2001–2010:Q3*

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2 Sources: A.M. Best, ISO.

95.7

99.3 99.7101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

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

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Lower CAT

Losses, More

Reserve Releases

34

Calendar Year Combined Ratios by Segment: 2008-2011F

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

102.4

98.9100

106

99.5

108

103.8104.5

9092949698

100102104106108110

Personal Lines Commercial Lines

2008 2009 2010P 2011F

Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

performance related to the prolonged commercial soft market

Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate

Underwriting Gain (Loss)1975–2010:Q3*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

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

The industry recorded a $6.2B underwriting

loss in 2010:Q3 compared to $3.2B in

2009:Q3

Cumulative underwriting deficit from 1975 through

2009 is $445B

($ Billions)

36

Number of Years with Underwriting Profits by Decade, 1920s–2000s

0 0

3

54

8

10

76

0

2

4

6

8

10

12

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

37

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

11

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2011E

Reserve Releases Are Remained Strong in 2010 But Should Begin to Taper Off in 2011

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: Barclay’s Capital; A.M. Best.

Prior year reserve releases totaled $8.8 billion in the

first half of 2010, up from $7.1 billion in

the first half of 2009

39

Inflation-Adjusted Dollar Value of Claims Paid by P/C Insurers, 1925–2010E*

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Sources: Insurance Information Institute research and calculations from A.M. Best data.

$0

$50

$100

$150

$200

$250

$300

$350

$400

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

E

Since 1925, P/C insurers have paid more than $12.6

trillion in claims to policyholders on an

inflation-adjusted basis

Claim payouts increased

exponentially for decades, but

more erratically in the post-1980 era

On an inflation-adjusted basis, claims paid have fallen to 1990s

levels, reflecting improved underwriting results, exposure

loss during the “Great Recession” and leakage to alternative markets

$ Billions

40

Cumulative Value of Inflation-Adjusted Claims Paid by P/C Insurers, 1925–2010E*

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Sources: Insurance Information Institute research and calculations from A.M. Best data.

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000$11,000$12,000$13,000$14,000

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

*200

0

*200

5

2010

E

Adjusted for inflation, it took 36 years for the

industry to pay its first $1 trillion in claims in the years since 1925. Today, the industry

pays $1 trillion in claims every 2 to 3 years after adjusting for inflation.

36 years (1925 – 1961)

$ Billions

9 years (1970)

7 years (1977)

5 years (1982)

4 years (1986)

4 years (1990)

3 years (1993)

3 years (1996)

4 years (2000)

2 years (2002)

3 years (2005)

3 years (2008)

41

$12.5 Trillion of Paid Claims and Someone Still Writes a Book With This Title?

This book by a Rutgers University law professor asserts

that insurers do everything possible to avoid paying

legitimate claims.

I debated the thesis of Prof. Feinman’s book and refuting his

allegations in a debate in New Orleans on March 24.

INVESTMENTS: THE NEW REALITY

42

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q31

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.0 $39.5

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:Q3In 2008, Investment Gains Fell by 50% Due to Lower Yields and

Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income

Investment Gains Recovered Significantly in 20101 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

($ Billions) 2009:Q3 gain was $29.3B

Investment gains in 2010 are on track to be their best since 2007

44

P/C Insurer Net Realized Capital Gains, 1990-2010:Q3

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

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

98

$4.4

3

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25-$20-$15-$10

-$5$0$5

$10$15$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910:Q3

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

Driver of Its Recovery in 2010

($ Billions)Capital losses have

turned to capital gains, aiding earnings

45

Treasury Yield Curves: Pre-Crisis (July 2007) vs. February 2011

0.11% 0.13% 0.17% 0.29%

0.77%

2.96%

3.58%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

2.26%

1.28%

4.65%4.42%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

February 2011 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at least 45 years, though longer yields rose in late 2010/early 2011 as

economy improved. Investment income is falling as a result.

The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Depress Rates in the 7 to 10-Year Maturity Range through

June

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

QE2 Target

46

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

War

rant

y

Surplu

s Line

s

Med

Mal

WC

Reinsu

ranc

e**

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

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

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

47*Net admitted assets. Sources: NAIC; Insurance Information Institute research.

Invested assets totaled $1.26 trillion

Generally, insurers invest conservatively, with over 2/3 of invested assets in bonds

Only 18% of invested assets were in common or preferred stock

Portfolio Factsas of 12/31/2009

68.8%

6.2%18.0%

7.0%

Bonds

Common & Preferred Stock

As of December 31, 2009

Cash & Short-term

Investments

Other

Distribution of P/C Insurance Industry’s Investment Portfolio

48

2011 Financial Overview About Half of the P/C Insurance Industry’s Bond Investments Are in Municipal Bonds

Sources: NAIC, via SNL Financial; Insurance Information Institute research.

Investments in “Political Subdivision [of states]” bonds were $102.5 billion

Investments in “States, Territories, & Possessions” bonds were $58.9 billion

Investments in “Special Revenue” bonds were $288.2 billion

All state, local, and special revenue bonds totaled 48.2% of bonds, about 35.7% of total invested assets

Bond Investment Factsas of 12/31/09

0.9%

2.0%15.5%

6.3%

11.0%

31.0%33.3%

U.S. Government

Special Revenue

As of December 31, 2009

States, Terr., etc.

Industrial

Foreign Govt

Political Subdivisions

2011 Financial Overview When P/C Insurers Invest in Higher Risk Bonds,It’s Corporates, Not Munis

Data are as of year-end 2009. Sources: SNL Financial; Insurance Information Institute.

The NAIC’s Securities Valuation Office puts bonds into one of 6 classes: class 1 has the lowest expected impairments; successively higher

numbered classes imply increasing impairment likelihood.

Financial Strength & Underwriting

54

Cyclical Pattern is P-C Impairment History is Directly Tied to

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–2010E*8

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15 16 18

9

5

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

*2010 estimate.Source: A.M. Best Special Report “1969-2009 Impairment Review,” June 21, 2010; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

8 of the 18 in 2009 were small Florida carriers. Total also

includes a few title insurers.

56

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

9*

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08

57

Reasons for US P/C Insurer Impairments, 1969–2009

3.6%4.0%

8.8%

7.1%

7.8%

7.2%

7.8% 13.6%

40.1%

Source: A.M. Best: 1969-2009 Impairment Review, Special Report, June 21, 2010

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

59

Performance by Segment:Commercial/Personal Lines &

Reinsurance

Homeowners Insurance Combined Ratio: 1990–2011P

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.3

94

.2 10

0.1

89

.4 95

.7

11

7.0

10

5.6

10

3.5

99

.0

11

8.4

11

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 10E11P

Homeowners Line Is Expected to Improve in 2011. Extreme Regional Variation Can Be Expected Due to Local Catastrophe

Loss Activity

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

Private Passenger Auto Combined Ratio: 1993–2011P

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.3

10

1.3

99

.0

98

.5

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

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

Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry

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

Commercial Multi-Peril Combined Ratio: 1995–2011P

11

9.0

11

9.8

10

8.5

12

5.0

11

6.2

11

6.1

10

4.9

10

1.9

10

5.4

95

.1 97

.6

94

.2

10

0.7

11

6.8

11

3.6

11

5.3

12

2.4

11

5.0

11

7.0

97

.3

89

.0

97

.7

93

.8

83

.8

89

.8

10

8.0

98

.6 10

1.0

10

3.0

11

3.1

11

5.0 1

21

.0

80

85

90

95

100

105

110

115

120

125

130

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

Commercial Multi-Peril Underwriting Performance is Expected to Deteriorate Modestly

*2010Eand 2011P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.

Commercial Auto Combined Ratio: 1993–2011P

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4 94

.2 96

.8 99

.5 10

2.0

10

4.0

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

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

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

Commercial Auto Underwriting Performance is Expected to Deteriorate Modestly

Workers Compensation Combined Ratio: 1994–2011P

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4 10

3.5

10

4.4 1

10

.5

11

7.5 12

1.5

12

1.7

10

7.0

11

5.3

11

8.2

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 10E 11P

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best; Insurance Information Institute.

EXPENSES

66

Expense Ratios Are Highly Cyclical and Contribute Deteriorating Underwriting Performance

Underwriting Expense Ratio*All P/C Lines, 1994-2010E**

25.9%26.1%

26.3%26.5%

26.3%

27.0%

27.4%

28.1%

28.6%

25.5%

25.0%

24.5%

27.0%

25.3%

27.6%

28.0%27.4%

22%

23%

24%

25%

26%

27%

28%

29%

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

*Ratio of expenses incurred to net premiums written.**2010 figure based on data through 2010:Q3.Source: A.M. Best; Insurance Information Institute.

Underwriting expense ratios are up

significantly as premiums fall faster

than expenses during generally soft market

conditions

Underwriting Expense Ratio*:Personal vs. Commercial Lines, 1990-2010E**

24.3%24.7%

24.4% 24.3%

26.4%26.6%

27.7%28.2%

29.9%

24.5%

26.4%

26.4%26.2%

24.7%24.7%24.6%24.4%

23.4%23.7%

23.5%

25.0%

23.9%

25.6%

25.6%

24.8%

30.5%30.6%

25.6%

28.5%

26.4%

26.6%

25.0%

29.1%

30.0%30.5%

28.4%

28.3%27.4%

27.8%

28.7%

29.3%

29.9%

20%

22%

24%

26%

28%

30%

32%

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

Personal Lines Commercial Lines

*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.

Commercial lines expense ratios are

highly cyclical

Underwriting Expense Ratio*Personal Lines (Auto & Home), 1994-2010E**

21.8%22.0%21.8%

23.5%

24.5%24.7%25.0%25.2%25.1%

29.8%

28.5%

29.3%

30.5%

24.3%24.4%

23.6%

23.4%

22.7%

23.2% 23.6%23.5%

29.6%

30.0%30.5%

28.4%

27.7%

28.5%

30.8%31.1%

30.8%

30.6% 30.3%

30.6%

29.4%

20%

22%

24%

26%

28%

30%

32%

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

Auto Home

*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.

Expenses ratios for both auto and home

are up from their lows in 2003/04

CAPITAL MANAGEMENT & LEVERAGE

70

Excess Capital is a Major Obstacle to a Market Turn;

Capital Management Decisions Will Impact Market Direction

72

Policyholder Surplus, 2006:Q4–2010: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

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)

Surplus set a new record in 2010:Q3*

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

The Industry now has $1 of surplus for every $0.77 of

NPW—the strongest claims-paying status in its history.

77

2.1

1.9

2.7

2.5

2.3

1.8

1.7

1.7

1.9

1.9

1.9

1.9

1.7

1.6

1.6

1.4

1.4

1.3

1.3

1.1

1.1

0.9

1.1

30

.94

0.8

60

.84

1.2

91

.17

1.0

70

.99

0.8

40

.91

0.7

90.9

50

.82

1.6

2.0

2.52.5

1.8

2.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98 0

02

04

06

08

10

*

The Premium-to-Surplus Ratio in 2010 Implies that P/C Insurers Held $1 in Surplus Against Each $0.79 Written in Premiums. In 1974, Each $1 of

Surplus Backed $2.70 in Premium.*2010 data are is estimated using annualized NWP data through 2010:Q3.Sources: Insurance Information Institute calculations from A.M. Best data.

Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2010*

The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.79:1 in 2010. It has decreased as PHS grows

more quickly than NPW, with the effect of holding down profitability.

Record High P-S Ratio was 2.7:1

in 1974

Record Low P-S Ratio was 2.7:1

in 2010*

Merger & Acquisition

78

Capital Cycles Can Drive Consolidation

U.S. P/C M&A Activity Rising, Volume Bouncing Back

81

Sources: Conning Research & Consulting through 2009; 2010 vol. est. from A.M. Best (2010 deal count N/A); Insurance Information Institute.

After a severe drop due to the capital crunch, M&A volume began to rebound in 2010. Levels remain below 1998-2000 and 2006 peaks.

Buyers are consistently more profitable than targets, rest of industry

The year before merger, eventual targets have earnings that lag industry average. Buyers’ earnings are higher than the industry.

Sources: SNL Financial; Insurance Information Institute.

Type of acquisition is shifting

There were 16 mutual targets in 2008-2010, up from 10 in the three prior years.

Sources: SNL Financial; Insurance Information Institute.

Shifting Legal Liability & Tort Environment

94

Is the Tort PendulumSwinging Against Insurers?

95

Important Issues & Threats Facing Insurers: 2011–2015

Source: Insurance Information Institute

Bottom Line: Tort “crisis” is less likely from rapid deterioration in the tort system overall, but costs still remain entrenched in the system

No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration

Erosion of recent reforms has already occurred

Legislative initiatives in 2009/10 were tort friendly

New Congress will have tempering effect on what could have been tort disaster

Torts twice the overall rate of inflation

Influence personal and commercial lines, esp. auto liability

Historically extremely costly to p/c insurance industry

Leads to reserve deficiency, rate pressure

Emerging Tort Threat

97

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

$0

$50

$100

$150

$200

$250

$300

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

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A

Tort Costs Have Remained High but Relatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as

the Economy Expands

Business Leaders Ranking of Liability Systems in 2010

Best States

1. Delaware

2. North Dakota

3. Nebraska

4. Indiana

5. Iowa

6. Virginia

7. Utah

8. Colorado

9. Massachusetts

10. South Dakota

Worst States

41. New Mexico

42. Florida

43. Montana

44. Arkansas

45. Illinois

46. California

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2010

North Dakota Massachusetts South Dakota

Drop-offs

Maine Vermont Kansas

Newly Notorious

New Mexico Montana Arkansas

Rising Above

Texas South Carolina Hawaii

Midwest/West has mix of good and bad states.

101

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

NevadaClark County

Watch List

Madison County, IL Atlantic County, NJ St. Landry Parish,

LA District of Columbia NYC and Albany,

NY St. Clair County, ILDishonorable

Mention

MI Supreme Court City of St. Louis CO Supreme Court

CaliforniaLos Angeles

and Humboldt Counties

Philadelphia

2010 Top Ten Jury Verdicts

Source: Lawyers USA, January 18, 2011.

Value Issue State

$505.1 Million Products Liability Nevada

$208.8 Million Personal Injury (Asbestos/Mesothelioma case) California

$152 Million Wrongful Death (Tobacco verdict) Massachusetts

$132.5 Million Personal Injury (Ford rollover retrial) Mississippi

$124.5 Million Personal Injury (Passenger van rollover case) Texas

$103 Million Legal Malpractice/Breach of Fiduciary Duty Mississippi

$90.8 Million Products Liability, Wrongful Death (Tobacco verdict) Florida

$89 Million Personal Injury, Products Liability Pennsylvania

$82.5 Million Wrongful Death Texas

$80 Million Wrongful Death (Tobacco verdict) Florida

How the Risk Dollar is Spent (2009)

Source: 2010 RIMS Benchmark Survey; Insurance Information Institute

Firms w/Revenues < $1 Billion

Other Costs, 17%

Prof. Liability Costs, 7%

Retained Property

Losses, 1%

Property Premiums,

9%

Admin Costs, 10%

Liability Premiums,

11%

WC Costs, 16%

Liability Retained

Losses, 10%

Total Mgmt. Liab., 4%

Retained WC Losses, 12%

Firms w/Revenues > $1 Billion

Retained WC Losses, 19%

Other Costs, 14%

Property Premiums, 9%

WC Costs, 21%

Total Mgmt. Liab., 5%

Liability Premiums,

11%

Retained Property

Losses, 1%

Retained Liability

Losses, 10%

Admin Costs, 10%

Prof. Liability Costs, 3%

Total liability costs account for about 30% of the risk dollar

Inflation

116

Is it a Threat to Claim Cost Severities

117

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

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

2.2 2.1 2.2 2.2

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 3/11 (forecasts).

The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns

Annual Inflation Rates (%)

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

term inflationary pressures

P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

1.6%1.0%

3.4%

8.8%

6.1%

3.3%

4.3%

3.1%

0%

3%

6%

9%

Overall CPI "Core" CPI Medical CPI InpatientHospitalServices

OutpatientHospitalServices

Physicians'Services

PrescriptionDrugs

Medical CareCommodities

Price Changes in 2010

Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least

118

Excludes Food and Energy

Economic Issues for the Next 3-5 Years

119

Growth in the Wakeof the “Great Recession”

120

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/11; Insurance Information Institute.

2.7

%

0.9

%

3.2

%

2.3

%

2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.7

%

1.7

%

2.6

%

2.8

%

3.4

%

3.4

%

3.4

%

3.4

%

3.1

%

3.2

%

3.2

%3

.3%

4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

Economic growth projections for 2011 have been revised

upward. This is a major positive for insurance demand

and exposure growth.

121

Real GDP Growth vs. Real P/CPremium Growth: Modest Association

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 3/11; Insurance Information Institute

4.3

%1

8.6

%2

0.3

%5

.8%

0.3

%-1

.6%

-1.0

%-1

.8%

-1.0

%3

.1%

1.1

%0

.8%

0.4

%0

.6%

-0.4

%-0

.3%

1.6

% 5.6

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.3%

-0.8

%-0

.8%

5.2

%-0

.9%

-7.4

%-6

.5% -1

.5%

1.8

%

-10%

-5%

0%

5%

10%

15%

20%

25%

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

E1

1F

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

Real NWP Growth Real GDP

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Real GDP Growth vs. Real P/C (%)

2011 Financial Overview State Economic Growth Varied in 2009

122

Mountain, Plains states still growing the fastest

Some Southeast states growing well, but others

among the weakest

123

Direct Premiums Written: All Lines Percent Change by State, 2004-2009

42

.9

23

.8

22

.0

18

.8

17

.2

15

.4

14

.8

14

.2

14

.1

14

.0

13

.5

13

.0

13

.0

12

.9

12

.8

12

.3

12

.2

11

.5

10

.7

7.9

5.8

5.5

5.1

5.0

4.6

0

5

10

15

20

25

30

35

40

45

ND LA

SD

WY

MT

UT

OK

DE IA

NM

MS

WV

SC

DC

TX

NE

KS

NC ID AL

FL

WA

GA

AR HI

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

124

4.5

4.2

2.6

2.5

2.4

2.0

0.9

0.7

0.6

0.5

0.0

-0.1

-2.8

-3.1

-3.5

-3.7

-5.2

-8.2

-9.2

-14

.8

-15

.2

-0.5

-1.2

-1.6

-1.8

-2.4

-20

-15

-10

-5

0

5A

K

VA

TN

KY

MD

MO AZ

OR WI

NV

NY IN PA

MN

VT

CO

CT RI

NJ IL

ME

OH

NH

MA MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

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

the past 5 years

Over the 5 years from 2004-2009, 15 states saw premiums shrink,one had no growth, and 4 others grew premiums by less than 1%

Direct Premiums Written: All Lines Percent Change by State, 2004-2009

125

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

127

(Millions of Units)

New Private Housing Starts, 1990-2016F

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

6 0.8

6

1.2

0 1.3

3 1.4

3

1.5

0

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 3/11); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is

estimated at about $1.3 billion

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

130

Wage and Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)

2011 Financial Overview Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

* Average Wage and Salary data as of 7/1/2010. Shaded areas indicate recessions. **Estimated “official” end of recession June 2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books

Weakening payrolls have eroded $2B+ in workers comp premiums; nearly 29% of NPW has been eroded away by the soft market and weak economy

7/90-3/91 3/01-11/01

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$0

$10

$20

$30

$40

$50

$60

Wage & SalaryDisbursements

WC NPW

WC net premiums written were down $13.7B or 28.7%

to $34.1B in 2009 after peaking at $47.8B in 2005

12/07-6/09

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Ju

n 1

0

Se

p 1

0

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. 131

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 75.2% of industrial

capacity in November 2010, above the June

2009 low of 68.3%

December 2007-June 2009 Recession

132

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3743

,016

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 0910

:3Q

Business Bankruptcy Filings,1980-2010:Q3

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

Significant Exposure Implications for All Commercial Lines

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q3

bankruptcies totaled 29,059, down 5.5% from 2009:Q3

% Change Surrounding Recessions

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

133

Private Sector Business Starts, 1993:Q2 – 2010:Q2*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

207

199

191 19

317

2 176

169

184

172

172

203

150

160

170

180

190

200

210

220

230

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

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

* Data through June 30, 2010 are the latest available as of March 10, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

(Thousands)

344,000 new business starts were recorded through the first half of 2010, which was likely the slowest year for

new business starts since 1993.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010:H1: 344,000

135

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

136

Unemployment and Underemployment Rates: Falling Faster in 2011?

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment rate fell to 8.8%

in March

Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years:

10.8% in November -

December 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 15.7% in March 2011

January 2000 through March 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure

Mar 11

18

67

92

13

65 1

27

42

15

-10

9-1

46

5 97

23

-12

-85 -58

-16

1-2

53

-23

0-2

57

-34

7-4

56

-54

7-7

34 -66

7-8

06 -7

07

-74

4 -64

9-3

34

-45

2-2

97 -2

15

-18

6-2

62

75

-83

16 6

2

24

15

1 61 1

17

14

31

12 1

93

12

8 16

79

42

40

23

0

14

4

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Monthly Change in Private Employment

January 2008 through March 2011* (Thousands)

Private Employers Added 1.999 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (Local

Govt. Employment is Down 416,000 Since Sept. 2008 Peak)

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

Private employers added jobs in every month in 2010 for a total of

1.435 million for the year

230,000 private sector jobs were created in

March

141

Unemployment Rates by State, February 2011:Highest 25 States*

13.6

12.2

11.5

11.2

10.4

10.4

10.2

10.2

10.2

10.2

9.7

9.7

9.6

9.6

9.5

9.4

9.4

9.3

9.3

9.2

9.2

9.1

9.0

8.9

8.9

8.8

0

2

4

6

8

10

12

14

16

NV CA FL RI KY MI GA MS OR SC ID NC AZ TN DC MO WV AL CO NJ OH WA CT IL US IN

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for February 2011, seasonally adjusted.

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

In February, 27 states and the District of Columbia had over-the-month

unemployment rate decreases, 7 had increases, and 16 had no change.

23 states + DC had unemployment rates above

the US average in Feb. 2011, 17 states were below.

142

8.7

8.5

8.2

8.2

8.2

8.0

7.9

7.8

7.7

7.6

7.5

7.4

7.4

7.1

6.8

6.7

6.5

6.4

6.3

6.2

6.1

5.6

5.4

4.8

4.3

3.7

0

2

4

6

8

10

NM DE MA NY TX PA LA AR UT AK ME MT WI MD KS MN OK VA HI WY IA VT NH SD NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, February 2011: Lowest 25 States*

*Provisional figures for February 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In February, 27 states and the District of Columbia had over-the-month

unemployment rate decreases, 7 had increases, and 16 had no change.

147

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

148

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$1

3.6

$1

.1

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??

US Insured Catastrophe Losses

*First quarter 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.

2010 CAT Losses Were Close to “Average” Figures Do Not Include an Estimate of Deepwater Horizon Loss

$100 Billion CAT Year is Coming Eventually

2010 CAT Losses Were

About Average

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

149

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2010E

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; Insurance Information Institute estimate for 2010.

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.

33.6

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

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

Combined Ratio Points

Thunderstorm losses have quadrupled since 1980.

First Half 2010 $3.0 Bn

U.S. Thunderstorm Loss TrendsAnnual Totals 1980 – 2009 vs. First Half 2010

Source: Property Claims Service, MR NatCatSERVICE 151© 2010 Munich Re

Source: Property Claims Service, MR NatCatSERVICE 152© 2010 Munich Re

Average annual winter storm losses have increased over 50% since 1980.

First Half 2010 $2.4 Bn

U.S. Winter Storm Loss TrendsAnnual totals 1980 – 2009 vs. First Half 2010

Severe winter storms in early 2010 caused major

damage to energy infrastructure

156

Total Value of Insured Coastal Exposure

(2007, $ Billions)

Source: AIR Worldwide

$224.4$191.9

$158.8$146.9$132.8

$92.5$85.6$60.6$55.7$51.8$54.1

$14.9

$479.9$635.5

$772.8$895.1

$2,378.9$2,458.6

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

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

More than $1.4 Trillion in

insured coastal exposure in

New England

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B

in insured coastal exposure

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

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