Overview & Outlook for the P/C Insurance Industry: Trends, Challenges and Opportunities in 2013 and Beyond International Association of Claims Professionals

Overview & Outlook for the P/C Insurance Industry:

Trends, Challenges and Opportunitiesin 2013 and Beyond

International Association of Claims ProfessionalsTucson, AZ

October 1, 2013Download at www.iii.org/presentations

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

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

3

CLAIMS GURU QUIZ

QUIZ: What is the significance of this number?

$7,932,848,563,867

4

$7,932,848,563,867

ANSWER: This is the dollar value of claims paid by P/C

insurers since 1925*

*Not adjusted for inflation.

5

Dollar Value of Claims Paid by P/C Insurers to Policyholders, 1925–2012E*

*1925 – 1934 stock companies only. Includes workers compensation state funds beginning in 1998.Note: Data are not adjusted for inflation.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

Since 1925, P/C insurers have paid more than $7.9 trillion in

claims to policyholders

Claim payouts increased

exponentially for decades

Claim payouts in recent years are volatile but have resumed

their climb due to higher catastrophes and post-

recession exposure growth

Catastrophe losses,

underwriting cycle contributed to recent volatility

$ Billions

6

Cumulative Value of Claims Paid by P/C Insurers to Policyholders, 1925–2012E*

*1925 – 1934 stock companies only. Includes workers compensation state funds beginning in 1998.Note: Data are not adjusted for inflation.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

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

It took 60 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 3 to 4 years.

60 years (1925 – 1984)

$ Billions

7 years (1991)

4 years (1995)

5 years (2000)

3 years (2003)

3 years (2006)

4 years (2010)

20

12

E

<3 years to hit $8 Tr.

7

P/C Insurance Industry Financial Overview

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

7

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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013:H1 ROAS1 = 8.5%E

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.5% ROAS in 2013:H1, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$2

5,0

00

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213:H1E

Net income is up substantially (+64%) from

2012:H1 $16.4B

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

:H1

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

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

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2012: 5.9%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013:H1 8.5%(est)

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

Combined Ratio / ROE

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

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

97.0

102.4

106.5

95.7

8.5%6.2%4.7%

7.9%7.4%

4.3%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:H1E0%

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

Low CATs are improving ROEs

in 2013

13

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

21

.3

16

.9

14

.8

13

.4

12

.8

12

.8

12

.5

12

.1

12

.0

11

.7

11

.2

11

.1

11

.1

11

.1

11

.1

11

.1

11

.0

10

.9

10

.8

10

.7

10

.5

10

.3

10

.1

9.8

9.8

9.4

02468

1012141618202224

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

Source: NAIC.

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

14

9.0

8.9

8.9

8.5

8.2

8.0

7.8

7.7

7.5

7.1

7.1

7.1

6.9

6.9

6.9

6.0

6.0

5.9

5.4

5.2

4.8

3.9

3.4

1.5

-8.3

-10

.8

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

10

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

Un

em

plo

ym

en

t R

ate

(%

)

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

Source: NAIC.

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

15

Growth Will Expand Insurer Exposure Base Across Most Lines

15

16

US Real GDP Growth*

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

2.7

%0

.5%

3.6

%3

.0%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%-0

.3%

1.4

%5

.0%

2.3

%2

.2%

2.6

%2

.4%

0.1

%2

.5%

1.3

%4

.1%

2.0

%1

.3% 3

.1%

1.1

% 2.5

%2

.1%

2.6

%2

.7%

2.8

%2

.9%

3.0

%

0.4

%

-8.9%

4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

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

was severe

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

drop of 6.8%

2013 is expected to see uneven growth,

then gradually accelerate throughout the year and into 2014

17

The Federal Government Budget Debacle: Shutdown, Debt Ceiling & More Congress Failed to Approve a CR Oct. 1 Shutdown 800,000 Federal Workers to Be Furloughed Estimated Economic Impact to the Economy

Modest at first: $1B in first week Mushroom to $55 billion after a month Could hurt consumer confidence, car and home sales if persists

Impacts to P/C Insurers Are Minimal Fire, police funded locally so will continue to function Insurer disaster response unaffected even if govt. shuts down Market volatility impacts asset values, but is manageable

Impact on FEMA Unclear Aid for new disaster occuring during shutdown? Pre-existing disaster aid (e.g., Sandy, CO floods)

Upcoming Debt Ceiling Debate (Oct. 17) More Dangerous Federal debt rating at risk; Impacts on interest rates

Affordable Care Act (ObamaCare): Grand Opening Today!

18

Health Insurance Marketplaces Are Open

Sources: Screen capture on Oct. 1, 2013 from www.HealthCare.gov; Insurance Information Institute.

19

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

13

.4

4.8

3.9

3.6

3.5

3.5

3.4

3.3

3.3

3.3

2.7

2.7

2.6

2.4

2.4

2.4

2.4

2.2

2.2

2.2

2.2

2.1

2.1

2.1

2.1

2.0

0

2

4

6

8

10

12

14

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

Pe

rce

nt

Ch

an

ge

(%

)

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

North Dakota was the economic growth juggernaut of the US

in 2012—by far

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

a more typical recovery

20

1.9

1.7

1.6

1.5

1.5

1.5

1.5

1.4

1.4

1.4

1.3

1.3

1.3

1.2

1.2

1.1

1.1

0.7

0.5

0.5

0.4

0.2

0.2

0.2

0.2

-0.1

-0.4-0.20.00.20.40.60.81.01.21.41.61.82.0

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

Pe

rce

nt

Ch

an

ge

(%

)

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

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

Connecticut was the only state to shrink in 2012

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

1% in 2012

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

Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute. 21

Some Mid-Atlantic and Southern state are more

vulnerable to the effects of sequestration

74

.47

3.6

73

.67

2.2

73

.6 76

67

.86

8.9

68

.26

7.7 7

1.6 74

.57

4.2 77

.56

7.5 69

.8 74

.37

1.5

63

.75

5.7 5

9.5

60

.9 64

.16

9.9

75

.07

5.3

76

.27

6.4 79

.37

3.2

72

.3 74

.38

2.6

82

.77

4.5

73

.8 77

.67

8.6

84

.58

4.1

85

.18

2.1

76

.8

76

.4

40

45

50

55

60

65

70

75

80

85

90

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2O

ct-1

2N

ov-

12

De

c-1

2Ja

n-1

3F

eb

-13

Ma

r-1

3A

pr-

13

Ma

y-1

3Ju

n-1

3Ju

l-1

3A

ug

-13

Se

p-1

3

Consumer Sentiment Survey (1966 = 100)

January 2010 through August 2013

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially over the past two years, though

uncertainty in Washington is taking a toll.Source: University of Michigan; Insurance Information Institute

Optimism among consumers dropped in September as a

looming government shutdown created uncertainty

24

Impact of 2011 budget impasse

25

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4

15.6 16

.1

16.0

16.2

16.2

16.2

16.216

.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

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

(Millions of Units)

Auto/Light Truck Sales, 1999-2019F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/13 and 3/13); Insurance Information Institute.

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

With Workers Comp Exposures

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

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

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

2013 and beyond

Truck purchases by contractors are especially strong

30

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.4

8

1.4

7 1.6

21

.64

1.5

71

.60 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

6

0.9

10

.55

0.5

9

0.6

1 0.7

8 0.9

5

1.1

7 1.3

5

1.4

41

.50

1.5

11

.50

1.3

51.4

61

.29

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

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

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/13 and 3/13); Insurance Information Institute.

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

Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

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

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage

rates and demographics are stimulating new home construction

for the first time in years

31

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates for 2011-2013 based on CPI data and other data.

$508$536

$593

$668

$822 $830

$880$909

$945$983

$1,022

$804$764

$729

$400

$500

$600

$700

$800

$900

$1,000

$1,100

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

Countrywide Home Insurance Expenditures Increased by an Estimated 4.0% in 2011-2013

32

Construction Employment,Jan. 2010—August 2013*

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

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

6 5,58

35,

576

5,57

7 5,61

25,

629

5,64

45,

640

5,63

65,

615

5,62

25,

627

5,63

05,

633

5,64

95,

673 5,

711

5,73

5 5,78

35,

797

5,79

25,

791

5,80

15,

798

5,79

8

5,400

5,450

5,500

5,550

5,600

5,650

5,700

5,750

5,800

5,850

5,900

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

132/

30/2

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Construction employment growth accelerated in the second half of

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

workers comp exposure growth.

(Thousands)

http://data.bls.gov/

33

Construction Employment, Jan. 2003–August 2013

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

5,000

5,500

6,000

6,500

7,000

7,500

8,000

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

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

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

Construction employment

troughed at 5.435 million in Jan.

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

plunge from the April 2006 peak

33

Construction employment

peaked at 7.726 million in April 2006

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

increase of 358,000 jobs or 6.6% from the

Jan. 2011 trough

39

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

-3.7%-2.4%

-3.7%

5.2%

9.5%

17.2%

2.0%

-5%

0%

5%

10%

15%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

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

Growth (%)

Private sector construction activity is now up in the

residential and nonresidential segments

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

Private: +9.5% Public: -3.7%

Public sector construction activity remains depressed

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

58

.35

7.1

60

.45

9.6

57

.85

5.3

55

.15

5.2

55

.3 56

.9 58

.25

8.5 6

0.8

61

.45

9.7

59

.75

4.2 55

.85

1.4 52

.55

2.5

51

.85

2.2 53

.1 54

.15

1.9 53

.35

4.1

52

.55

0.2

50

.55

0.7

51

.65

1.7

49

.95

0.2

53

.1 54

.2

50

.74

9.0 5

0.9

55

.45

5.7

51

.3

40

45

50

55

60

65

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-

13

Jun

-13

Jul-

13

Au

g-1

3

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through August 2013

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

Europe and a Slowdown in China.

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

Manufacturing expanded in August, albeit modestly

42

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

49

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

17

51

86

17

41

80

18

61

92

18

81

87 18

91

86 1

90 1

94

19

11

99 2

04

20

21

95

19

61

96

20

62

06

20

11

92

19

82

06

20

62

03

21

12

05

21

22

00 2

05

20

42

04

19

72

03

20

92

01

19

21

92

19

32

01 20

42

02

21

0 21

22

09

21

6 22

0 22

32

20

22

02

10

22

12

12

20

42

18

20

92

07

20

71

99

19

1 19

31

72 1

76

16

91

84

17

5 17

91

88

20

01

83 1

87 1

91

19

71

93

19

1 19

31

92

20

3

150

160

170

180

190

200

210

220

230

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

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

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

(Thousands)

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

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

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

49

http://www.bls.gov/news.release/cewbd.t08.htm

NFIB Small Business Optimism Index

January 1985 through July 2013

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 50

Small business optimism is off crisis lows but still suffering

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

http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif

51

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)

52

Questionable Claims: On the Rise

More Questionable Claims in Most State and Across Most

Lines of Insurance

52

53

Questionable Claims, Top 10 Loss States, All Lines: 2010–2012

Source: National Insurance Crime Bureau, ForeCAST Report, May 10, 2013; Insurance Information Institute

17

,09

2

8,7

23

7,5

20

7,0

15

2,4

85

2,9

61

2,8

12

3,5

11

2,1

87

2,1

93

19

,38

8

9,6

70

8,0

16

7,3

28

3,5

35

3,6

14

3,1

63

3,2

55

2,6

17

2,6

21

21

,93

5

10

,69

3

10

,36

8

9,0

59

4,2

96

4,1

26

3,8

55

3,5

38

3,3

53

3,2

89

0

5,000

10,000

15,000

20,000

25,000

CA FL TX NY MD GA NC IL PA OH

2010 2011 2012

(Number of Questionable Claims)

California had the largest number of Questionable

Claims in 2012, but Maryland led the way in growth, with the number of QCs up by 72.9% from 2010 to 2012

+28.3%

+22.6% +37.9%

+29.1%

+72.9% +39.3% +37.1% +0.8 +53.3 +50.0

54

Total Number of Questionable Claims by State, 2012: Highest 25 States

21,9

35

10,6

93

10,3

68

9,05

9

4,29

6

4,12

6

3,85

5

3,53

8

3,35

3

3,28

9

3,13

4

2,52

1

2,34

6

2,30

0

2,13

3

1,97

9

1,91

3

1,66

3

1,59

6

1,58

5

1,52

3

1,45

3

1,40

8

1,37

5

1,36

6

0

6,000

12,000

18,000

24,000

CA FL TX NY MD GA NC IL PA OH MI VA MA NJ AZ SC WA CO KY MO TN CT IN MN LA

Sources: NICB; Insurance Information Institute.

California had the largest number of

Questionable Claims in 2012

55

1,24

9

1,14

7

1,06

7

1,02

4

933

869

755

688

643

636

587

522

434

430

383

378

348

209

206

195

172

147

96 89 89 68

0

200

400

600

800

1,000

1,200

1,400

OR AL NV OK WI NM AR KS MS HI RI DC UT WV DE IA NE NH AK ID ME MT VT SD WY ND

Total Number of Questionable Claims by State, 2012: Highest 25 States


North Dakota had the fewest number of


56

Total Number of Questionable Claims by State, per 100K Persons, 2012: Highest 25 States

83

73

58 56 55

46 46

42 42 42 42 40 40 40 39

36 35 33 32 32 32 31 30 28 28

0

10

20

30

40

50

60

70

80

90

100

DC MD CA RI FL NY HI GA SC NM DE TX NC CT NV KY MA AZ MI CO OR VA LA OH WA


DC followed by Maryland California had the highest rate

of Questionable Claims in 2012

57

Total Number of Questionable Claims by State, per 100K Persons, 2012: Lowest 25 States

28

27 27

26 26 26 26 26

24 24 24

23

22 22

19

16 16

15 15 15 15

13

12 12

11

10

0

5

10

15

20

25

30

AK IL OK PA NJ MO MN AR TN AL KS WV IN MS NE WI NH UT MT VT WY ME IA ID SD ND


North and South Dakota had the lowest rate of


58Source: National Insurance Crime Bureau, ForeCAST Report, May 10, 2013; Insurance Information Institute

3,9

99

2,0

93

1,1

95 1,6

93

80

1 1,1

67

1,5

48

62

9

48

8 86

7

4,4

25

2,4

40

1,9

99

1,7

61

1,2

95

1,2

40

1,3

41

75

0

57

4 85

8

5,1

40

3,2

46

2,3

09

2,0

10

1,5

94

1,3

98

1,1

19

1,0

30

89

2

87

7

0

1,000

2,000

3,000

4,000

5,000

6,000

New York LosAngeles

Miami Houston Baltimore Chicago Detroit Philadelphia Dallas Orlando

2010 2011 2012


New York City had the largest number of Questionable Claims in 2012, but Miami and Baltimore led the way in growth, with the number of QCs nearly doubling

from 2010 to 2012

+28.5%

+55.1%

+93.2%

+18.7% +99.0%

+19.8% -27.7%+63.8

+82.8 +1.2

Questionable Claims, Top 10 Loss Cities, All Lines: 2010–2012

59Source: National Insurance Crime Bureau, ForeCAST Report, May 10, 2013; Insurance Information Institute

62

,48

1

11

,67

7

3,2

22

2,8

66

2,2

98

85

9

69

8

35

7

45

7

38

3

69

,21

9

11

,87

7

3,4

70

3,0

52

2,5

71

1,0

90

69

8

38

7

48

8

32

5

78

,02

4

17

,18

3

4,4

59

3,5

54

2,6

50

2,6

21

94

1

46

4

41

1

40

6

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Pvt. Pass.Auto

PersonalProp.: HO

WC & EL Comm.Auto

CGL PersonalProp:Other

Comm.Prop:CMP

Comm.Liab: Bus.

Owners

Pers.Prop.:Fire

Comm.Prop:Bus.

Owners

2010 2011 2012


Private Passenger Auto had the largest number of

Questionable Claims in 2012, but Personal Property (Other) led the way in growth, with the

number of QCs more than tripling from 2010 to 2012

+24.9%

+47.1%

+38.4% +2.4% +15.3% +205.1%

+34.8% +30.0% -10.1% +6.0%

Questionable Claims, Top 10 Policy Types: 2010–2012

60

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

60

61

Unemployment and Underemployment Rates: Stubbornly High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.3% in Aug. 2013—its

lowest level since Dec. 2008.

Unemployment peaked at 10.1% in

October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years: 10.8% in

November - December 1982

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

U-6 went from 8.0% in March

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

January 2000 through August 2013, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

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

61

22

75

41

68

50

12

36

61

-79

24 6

8 74

51

2-1

14

-10

5-2

22

-21

9-2

03

-26

7-2

69

-42

9-4

84

-78

6 -70

1-8

21

-69

2-8

12

-82

1-2

88

-44

2-2

82 -2

22 -1

62

-23

3-3

4-1

67

-17

-26

17

01

02

94 10

31

29

11

3 18

81

54

11

48

02

43

22

3 30

31

83

17

72

06

12

92

56

17

41

97 24

9 32

32

65

20

81

20 15

27

81

77

13

11

18

21

7 25

62

24

16

43

19

15

4 18

81

87

19

41

27

15

2

11

1

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-

13

Jun

-13

Jul-

13

Jul-

13

Monthly Change in Private Employment

January 2007 through August 2013 (Thousands, Seasonally Adjusted)

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

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

152,000 private sector jobs were created in July

62

Jobs Created2013 YTD: 1.485 Mill

2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill

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

4-1

033

9251

128

798

-68

-224 -1

84-1

94-2

13-2

24-2

71-2

89-2

88-3

56 -324

-452

-449

-480

-488

-511

-530

-542

-536

-539

-547

-574

-565

-589 -555

-535

-592

-601

-606

-622

-609

-610

-621

-643

-666

-649-6

21

-800

-600

-400

-200

0

200

400

600

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Jul-1

3

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

January 2010 through August 2013* (Millions)

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

Cumulative job losses through June 2013 totaled 649,000

65

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

Financial Crisis: Sequestration Will Add to this Toll

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

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

be stabilizing.

Temporary Census hiring distorted 2010

figures

http://www.bls.gov/data/

66

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

-649

-418

-143-88

-700

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 418,000 from Jan.

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

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

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

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

Federal employment is down by 2.9%

http://www.bls.gov/data/

67

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

9.5

9.2

9.1

9.0

8.9

8.7

8.7

8.7

8.5

8.5

8.5

8.4

8.3

8.1

8.1

8.1

8.1

7.7

7.6

7.4

7.3

7.3

7.2

7.2

7.0

0

2

4

6

8

10

12

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

Une

mpl

oym

ent R

ate

(%)

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

In August, 18 states and the District of Columbia had over-the-month

unemployment rate increases, 17 states had decreases, and 15 states had no

change.

68

7.0

7.0

7.0

7.0

7.0

6.8

6.8

6.7

6.5

6.4

6.3

6.3

5.9

5.8

5.3

5.3

5.1

5.0

4.9

4.7

4.6

4.6

4.3

4.2

3.8

3.0

0

2

4

6

8

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

Un

em

plo

ym

en

t R

ate

(%

)

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

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

In August, 18 states and the District of Columbia had over-the-month

unemployment rate increases, 17 states had decreases, and 15 states

had no change.

Nebraska has th e 3rd lowest unemployment rate in the US!

70

US Unemployment Rate Forecast

4.5

%4

.5%

4.6

%4

.8%

4.9

% 5.4

% 6.1

%6

.9%

8.1

%9

.3%

9.6

% 10

.0%

9.7

%9

.6%

9.6

%

8.9

%9

.1%

9.1

%8

.7%

8.3

%8

.2%

8.0

%7

.8%

7.7

%7

.6%

7.4

%7

.3%

7.2

%7

.1%

7.0

%6

.8%

9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

Rising unemployment

eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10%

in late 2009.

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

2007:Q1 to 2014:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

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

Jobless figures have been revised

slightly downwards for 2013/14

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

73

Payroll Base* WC NWP

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

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

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

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

+9% in 2012E

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

74

U.S. Insured Catastrophe Loss Update

Catastrophe Losses in Recent Years Have Been Very High

74

75

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.6

$3

5.0

$7

.9$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

U.S. Insured Catastrophe Losses

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

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

Average But Q3 Is Typically the Costliest Quarter.

2012 was likely the third most expensive year ever for insured

CAT losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

75

76

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

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

$23.9 $24.6$25.6

$48.7

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

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

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

insurance history

Hurricane Irene became the 12th most expense hurricane

in US history in 2011

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade

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

77

Top 16 Most Costly World Insurance Losses, 1970-2012*


*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

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

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

*Through June 30, 2013.Source: MR NatCatSERVICE 78

41

19

121

3

50

100

150

200

250

300

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

There were 68 natural disaster events in the

first half of 2013

Losses Due to Natural Disasters in the US, 1980–2013 (Jan.-June Only)

79

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

Source: MR NatCatSERVICE

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

10

20

30

40

50

60

70

80

90

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

First Half 2013 losses were running below 2011 and 2012 but

were consistent with the decade prior.

Approximately 57% of the overall cost of

catastrophes in the US was covered by

insurance in 2013:H1

2013 First Half Losses

Overall : $13.8B

Insured: $7.9B

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters Worldwide,1980 – 2013* (Number of Events)

*Through June 30, 2013.Source: MR NatCatSERVICE 80

41

19

121

3

200

400

600

800

1 000

1 200

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

Nu

mb

er

There were 460 natural disaster events globally in the first half of 2013

and 905 for full-year 2012

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

81


*Through June 30, 2013.Source: MR NatCatSERVICE


50

100

150

200

250

300

350

400

450

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

2012 Losses

Overall : $101.1B

Insured: $57.9B

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

30+ years

2013: 1st Half Losses

Overall : $45B

Insured: $13B

85

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)

86

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

The value of insured coastal exposure in NY is now highest in the US for

the first time.

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

88Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

losses are up 7 fold since the early

1980s. The 5- year running average

loss is up sharply.

Hurricanes get all the headlines, but thunderstorms are consistent

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

years on record.

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

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

Hurricane Sandy Summary

93

Sandy Became One of the Most Expensive Events in

Insurance History

93

Hurricane Sandy: Claim Payments to Policyholders, by State

$9,600

$6,300

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

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

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

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

94

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

from Hurricane Sandy

TOTAL = $18.75 BILLION($ Thousands)

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

Auto, 250,500 ,

16%

Commercial, 202,500 ,

13%

Homeowner, 1,067,000 ,

71%

Hurricane Sandy resulted in an

estimated 1.52 million privately insured

claims resulting in an estimated $18.75 to

$25 billion in insured losses. Hurricane

Katrina produced 1.74 million claims and

$48.7B in losses (in 2012 $)

Hurricane Sandy: Number of Claims by Type*

*PCS claim count estimate s as of 1/18/13. Loss estimate represents PCS total ($18.75B) and upper end of range estimates by risk modelers RMS, Eqecat and AIR. All figures exclude losses paid by the NFIP.Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 95

Sandy is a high HO frequency, (relatively

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

Total Claims = 1.52 Million*

Auto, $2,729 , 15%

Commercial, $9,024 ,

48%

Homeowner, $6,997 ,

37%

Although Commercial Lines accounted for

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

dollars paid. In most hurricanes,

Commercial Lines accounts for about

1/3 of insured losses.

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

*PCS insured loss estimates as of 1/18/13. Catastrophe modeler estimates range up to $25 billion. All figures exclude losses paid by the NFIP.Source: PCS; Insurance Information Institute. 96

Total Claim Value = $18.75 Billion*

97

Total Value of Insured Coastal Exposure in 2007

(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

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

100

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

0.4%

1.6%

3.8%4.7%

6.3%

7.3%

33.9%

42.0%

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

Hurricanes & Tropical Storms, $161.3

Fires (4), $6.0

Tornadoes (2), $130.2

Winter Storms, $28.2

Terrorism, $24.4

Geological Events, $18.2

Wind/Hail/Flood (3), $14.8

Other (5), $1.4

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1992-2011

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

per month

Homeowners Insurance Catastrophe-Related Claim Frequency and Severity, 1997—2012*

*All policy forms combined, countrywide.Source: Insurance Research Council, Trends in Homeowners Insurance Claims, Sept. 2012 from ISO Fast Track data. 101

Avg. catastrophe claim cost rose

approximately 200% from 1997-2011

Cat claim frequency in 2011 was at historic highs and more than

double the rate in 1997

102

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

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

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7 9.

4

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

E

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

Avg. CAT Loss Component of the Combined Ratio

by Decade

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

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

a record high in 2012

Terrorism Update

115

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

115

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

Life$1.2 (3%)

Aviation Liability

$4.3 (11%)

Other Liability

$4.9 (12%)

Biz Interruption $13.5 (33%)

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

Other$7.4 (19%)

Aviation Hull$0.6 (2%)

Event Cancellation

$1.2 (3%)Workers Comp

$2.2 (6%)

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

**$32.5 billion in 2001 dollars.

Source: Insurance Information Institute.

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

($ Billions)

119

TRIA Outlook

Difficult Reauthorization Battle Ahead Very difficult to overcome antigovernment/small government, Tea

Party forces in the House

Most Committee members in both houses weren’t around in 2007

House Hearings in 2012; House and Senate in Sept. 2013 If Reauthorized, Insurer Participation Likely Increased Some Have Attacked TRIA as “Corporate Welfare”

In reality the taxpayer is 100% protected NFIP, Crop programs have led to miscomprehensions

Emphasizing Benefits to Employees Under WC is Key Misperception by Some that Terrorism is Urban Issue Certification Process Needs Clarification

Public Opinion Survey

126

Industry Favorability RatingsPolicy Forms & Disclosure

Disaster Preparedness

126

128

I.I.I. Poll: Homeowners Insurance

Q. Do you think that it is fair that people who live in areas affected by record storms in 2011 and 2012 should pay more for their homeowners insurance in the future?

Source: Insurance Information Institute Annual Pulse Survey.

Nearly 60 percent of Americans believe that homeowners insurance premiums should not be raised as a result of recent storms in their areas.

4%

37%

59%

Don’t know

Yes

No

Public believes it is not fair to raise

premiums of homeowners due

to events they cannot control

129

I.I.I. Poll: Flood Insurance


55%46% 47%

58% 61%

0%

20%

40%

60%

80%

Total U.S. Northeast West Midwest South

Q. The federal government plans to raise the price of flood insurance so it reflects the costs of paying claims. Do you believe this is fair? [% Responding “NO”]

More than one-half of Americans do not think it is fair for the federal government to raise its flood insurance premiums to better reflect claims

payouts.

Most people believe it is unfair for government to raise flood insurance premiums, even though

they are subsidized by taxpayers

132

I.I.I. Poll: Disaster Preparedness

Q. If you expect some relief from the government, do you purchase less insurance coverage against these natural disasters than you would have otherwise?


Seventy-two percent of Americans would not purchase less insurance if they expect some relief from the government—but 22% would.

6%

22%

72%

Don’t know

Yes

No

More than 20 percent cut back

on insurance coverage in

expectation of government disaster aid

133

Growth Analysis by State and Business Segment

Premium Growth Rates Vary Tremendously by State

133

134

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

58

.4

25

.4

24

.5

21

.0

19

.2

17

.6

16

.3

13

.2

13

.2

12

.4

9.9

9.2

9.2

8.5

8.0

6.2

5.8

5.2

4.5

4.4

4.3

4.3

4.2

4.0

3.8

3.6

0

10

20

30

40

50

60

70

ND

SD

OK

NE IA KS

VT

AK

TX

WY

MN

AR

TN IN W

I

KY

MT

OH LA

VA

NJ

MI

SC

CO

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

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

expanding by 58.4%

135

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

3.6

3.1

3.0

2.9

2.7

2.2

2.1

2.1

2.0

1.8

1.1

0.0

-0.1

-0.3

-0.7

-0.9

-2.8

-5.6

-6.0

-7.2

-7.2

-9.3

-10

.1

-11

.2

-12

.5

-17

.3

-20

-15

-10

-5

0

5

CT

MS

NC AL

MD PA

U.S

.

MA IL

WA

GA

UT

NH RI

ID ME

NY FL

CA

DC

WV HI

AZ

OR

DE

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States


Growth was negative in 13 states and DC between

2007 and 2012

140

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

72

.2

35

.2

28

.8

25

.7

21

.0

20

.2

16

.0

15

.1

14

.6

8.8

6.3

4.6

3.3

2.9

1.5

1.2

0.0

-1.5

-2.3

-2.4

-2.6

-2.6

-3.2

-3.3

-3.5

-3.7

-20

0

20

40

60

80

ND

OK

SD VT

NE IA KS

AK ID WY

TX

MN IN WI

AR

TN

MT

OH LA

MA

PA

CT

MS

NM IL

WA

Pe

ce

nt

ch

an

ge

(%

)


Top 25 States

Only 16 states showed any commercial lines growth

2007 and 2012

141

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

-4.1

-4.2

-4.5

-4.6

-4.9

-4.9

-5.1

-5.4

-5.9

-6.2

-6.5

-6.8

-6.8

-6.9

-7.3

-9.1

-10

.2

-11

.1

-13

.2

-14

.5

-15

.3

-16

.2

-16

.8

-20

.2

-22

.2

-30

.3

-40

-35

-30

-25

-20

-15

-10

-5

0

US

NY

MD

NH NJ

MO

ME

NC

KY VA RI

CO MI

SC AL

GA

CA

UT

DC

OR HI

DE FL AZ

WV

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States


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?

149

Catastrophes and Other Factors Are Pressuring Insurance Markets

149

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$45.5

$39.6

$49.5

$52.3

$30

$40

$50

$60

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

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

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

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

156

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

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

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Recession2-Yr Yield10-Yr Yield

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

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

U.S. Treasury security yields

recently plunged to record lows

156

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

163

-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

Warra

nty

Surplu

s Line

s

Med

Mal

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*

163

1. UNDERWRITING

165

Underwriting Losses in 2011 and 2012 Are Elevated by High

Catastrophe Losses

165

166

P/C Insurance Industry Combined Ratio, 2001–2013:H1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2013. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

97.0

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120Best

Combined Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses Before Sandy

Underwriting Gain (Loss)1975–2013:Q1*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

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

Cumulative underwriting deficit from 1975 through

2012 is $510B

($ Billions)Underwriting

profit in 2013:Q1

totaled $4.6B

High cat losses in 2011 led to the highest

underwriting loss since 2002

170

2

(2)

(8)

(3)

(7)(10)(10)

(4)

(0)

11

24

1411 9

(5)

(9)

(13)(12)

(10)

(14)(12)

(10)(7) (7)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

E

14

E

15

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2015E

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

Financial Strength & Underwriting

171

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

Underwriting, Reserving & Pricing

171

P/C Insurer Impairments, 1969–20128

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 1

9 21

34

18

5

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012 and March 6, 2013 update; Insurance Info. Institute.

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

172

Impairments among P/C insurers remain infrequent

174

Reasons for US P/C Insurer Impairments, 1969–2010

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

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 (Overstatement of Assets)

Misc.

Sig. Change in Business

177

Performance by Segment

177

Homeowners Insurance Combined Ratio: 1990–2015F

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

.2

94

.4 10

0.3

89

.0 95

.7

11

6.9

10

5.8

10

6.7

12

2.2

10

4.4

10

1.7

10

1.2

10

0.7

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 10 11 12E13F 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

Sources: A.M. Best (1990-2011);Conning (2012E-2015F); Insurance Information Institute. 179

Hurricane Ike

Hurricane Sandy

Record tornado activity

Hurricane Andrew

10

9.4

11

0.2

11

8.8

10

9.5 1

12

.5

11

0.2

10

7.6

10

4.1

10

9.7

11

0.2

10

2.5 1

05

.4

91

.1

93

.6

10

4.2

98

.9

10

2.1

10

6.7

10

4.9

10

2.1

10

1.4

10

1.3

10

2.0

11

1.1

11

2.3

12

2.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

F

14

F

15

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

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

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

182

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

101.

4

104.

4

105.

8

108.

3

107.

1 110.

8

99.8

80

85

90

95

100

105

110

115

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

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 185

Workers Compensation Combined Ratio: 1994–2012P

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5

103.

5

104.

5 110.

6 115.

0

115.

0

109.

0

121.

7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

130

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

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

2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute. 190

WC showed a better-than-expected

improvement for private carriers in 2012

Workers Compensation Medical SeverityModerate Increase in 2012

191

Accident Year

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

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

$8

.1

$8

.2

$8

.1

$8

.8

$9

.2

$9

.9

$1

0.9

$11

.8

$1

3.1

$1

4.0

$1

5.9

$1

7.3

$1

8.7

$1

9.7

$2

1.2

$2

2.3

$2

3.7

$2

5.3

$2

6.4

$2

6.7

$2

7.7

$2

8.5

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

+7.4%+10.1%

+8.3%+10.6%

+7.3%

+13.5%+8.8%

+7.7%+5.4%

+7.8%+5.4%

+6.3%

+6.6%+4.1%+1.4%

+3.6%+3%

5

10

15

20

25

30

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

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

Cumulative Change = 252%(1991-2012p)

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

Accident Year

4.5%

3.5%2.8%

3.2%3.5%4.1%

4.6%4.7%4.0%

4.4%4.2%4.0%4.4%

3.7%3.2%3.4%

3.0%

5.1%

7.4%

10.1%10.6%

13.5%

5.4%

7.8%

6.3%6.6%

4.1%3.6% 4%

3%

1.4%

5.4%

8.8%

7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

Change in Medical CPI

Change Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate

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

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

the gap is narrowing.

2. SURPLUS/CAPITAL/CAPACITY

205

How Will Large Catastrophe Losses Impact Capacity?

205

207

Policyholder Surplus, 2006:Q4–2013:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6

$550.3

$567.8

$583.5$586.9

$607.7

$570.7$566.5

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

$600

$620

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

2007:Q3Pre-Crisis Peak

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

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

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

of NPW, close to the strongest claims-paying

status in its history.

Drop due to near-record 2011 CAT losses

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

Season Very Strong Financially.

209

3. REINSURANCE MARKET CONDITIONS

Ample Capacity as Alternative Capital is

Transforming the Market

209

210

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%

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

80

100

120

140

160

180

200

US

D b

n

Soft market

Hard market

Hard market softening

Crisis

Excess capital

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

Source: Guy Carpenter

Alternative Capacity as a Percentage of Global Property Catastrophe Reinsurance Limit

Source: Guy Carpenter

(As of Year End)

Alternative Capacity accounted for approximately 14% or $45 billion

of the $316 in global property catastrophe reinsurance capital as

of mid-2013 (expected to rise to ~15% by year-end 2013)

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

*Through July 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

4,76

7.6

1,991.11,142.8

1,729.8

6,99

6.3

4,69

3.4

1,219.5$3

,450

.0

$4,0

40.4

$4,9

04.2

$8,5

41.6

$14,

024.

2

$12,

043.

6

$12,

508.

8

$12,

185.

0

$12,

139.

1

$14,

835.

7

$16,

617.

3

$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 7M13

Risk Capital IssuedRisk Capital Outstandng at Year End

Catastrophe Bond Issuance Is Approaching Pre-Crisis Levels While Risk Capital Outstanding Stands at an All-Time Record

CAT bond issuance will likely reach a record high in 2013v

Risk capital outstanding

reached a record high in 2013

Financial crisis depressed issuance

4. RENEWED PRICING DISCIPLINE

229

Evidence of a Broad and Sustained Shift in Pricing

229

231

-5%

0%

5%

10%

15%

20%

25%

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

:Q1

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

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

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

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

2013:Q1 = 4.1%

2012 growth was +4.3%

234

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

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%4

.3%

3.9

%5

.0%

5.2

%4

.3%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

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

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

KRW Effect

Pricing as of Q2:2013 was positive for the89th consecutive

quarter. Gains are likely to continue through 2013.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

Shifting Legal Liability & Tort Environment

242

Is the Tort PendulumSwinging Against Insurers?

242

243

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

$0

$50

$100

$150

$200

$250

$300

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

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

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

Tort costs in dollar terms have remained high but relatively stable

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

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

Business Leaders Ranking of Liability Systems in 2012

Best States

1. Delaware

2. Nebraska

3. Wyoming

4. Minnesota

5. Kansas

6. Idaho

7. Virginia

8. North Dakota

9. Utah

10. Iowa

Worst States

41. Florida

42. Oklahoma

43. Alabama

44. New Mexico

45. Montana

46. Illinois

47. California

48. Mississippi

49. Louisiana

50. West Virginia

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

New in 2012

Wyoming Minnesota Kansas Idaho

Drop-offs

Indiana Colorado Massachusetts South Dakota

Newly Notorious

Oklahoma

Rising Above

Arkansas

246

247

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

248

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

248

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 March 19, 2013.Source: Identity Theft Resource Center

157

321

446

656

498

419447

662

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 20120

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The total number of data breaches and number of records exposed fluctuates from year to year and over time.

Millions

254

External Cyber Crime Costs: Fiscal Year 2012

2%5%

19%

30%

44%

* Other costs include direct and indirect costs that could not be allocated to a main external cost categorySource: 2012 Cost of Cyber Crime: United States, Ponemon Institute.

Information loss (44%) and business disruption or lost productivity (30%) account for the majority of external costs due to cyber crime.

Information loss

Equipment damagesOther costs*

Revenue loss

Business disruption

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Insurance Information Institute Online:

262

http://www.iii.org/presentations

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

263


Source: MR NatCatSERVICE


20

40

60

80

100

120

140

160

180

200

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

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

the US.

Approximately 57% of the overall cost of

catastrophes in the US was covered by insurance in 2012

2012 Losses

Overall : $101.1B

Insured: $57.9B

Documents

Overview & Outlook for the P/C Insurance Industry: Trends, Challenges and Opportunities in 2013 and Beyond International Association of Claims Professionals