Overview & Outlook for the P/C Insurance Industry

Drivers of Revenue, Cost and Competition in the Aftermath of the “Great Recession”

Independent Insurance Agents of Westchester County Tarrytown, NYMarch 3, 2011

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 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 5 Key Pillars of Profitability: Past, Present & Future

Underwriting Pricing Trends (Commercial Lines) Investments Expenses Leverage

External Factors Influencing Profitability Tort System Review: Overview and Causes for Concern Regulatory Environment

Exposure Analysis: Where Will Growth Come from in the Aftermath of the Great Recession?” Crisis-Driven Exposure Issues: Commercial Lines Growth in the Post-Crisis World

Catastrophe Loss Review 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 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 virtually disappeared

Private Sector Hiring is Consistently Positive for 13 Months Acceleration in hiring later in 2011 No significant secondary spike in unemployment

Sovereign Debt, Muni Bond “Crises” Overblown Current Middle East Turmoil Poses Little 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

P/C Insurance Industry Financial Overview

Profit Recovery ContinuesEarly Stage Growth Begins

P/C Net Income After Taxes1991–2010:Q3 ($ 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

$2

6,7

00

$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 10:Q3

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

10

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)

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.

Profit Pillar #1UNDERWRITING

14

Cyclicality is Driven Primarily by the Industry’s Underwriting

Cycle, Not the Economy

15

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

Underwriting Gain (Loss)1975–2010:Q3*

* Includes mortgage and financial guarantee 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 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

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)

17

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

21

Performance by Segment:Commercial/Personal Lines

Auto/Home Outperform Most Commercial Lines

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 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

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.

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.

28

New York No-Fault Update

Costs Among the Highest in the US and Continue to Rise

29

Average No-Fault Claim Severity, 2010:Q3

$1

6,3

31

$8

,64

7

$8

,09

6

$5

,39

4

$5

,06

1

$4

,27

7

$3

,66

4

$3

,38

5

$3

,22

1

$3

,21

4

$3

,22

6

$2

,72

2

$2

,61

7

$2

,17

9

$1

,89

1

$3

6,4

63

$7

,64

3

$7

,36

4

$5

,39

5

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

MI NJ NY FL DE MN DC ND HI PA OR WA KY TX KS MD SC UT MA

Several States Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.

Source: ISO/PCI Fast Track data; Insurance Information Institute.

MI, NJ, NY and FL currently are the largest states that have the most severe

problems in their no-fault system

NY has the 3rd highest auto no-fault average claim cost (severity) in the US

30

Increase in No-Fault Claim Severity: 2004-2010*

*2009 figure is for the 4 quarters ending 2010:Q3.**Since 2006 the increase in Florida was 23.7% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data.

$35,865

$16,573

$8,776 $7,847$6,674$5,871

$12,136

$24,385

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Michigan New Jersey New York Florida

2004 2010*

The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers

+47.1%

+36.6%

+49.5% +17.6%**

31

New York State No-Fault Claim Severity, 1997–2010:Q3

Sources: ISO/PCI Fast Track data; Insurance Information Institute.

$5,6

75 $6,0

63$6

,699

$8,3

47$8

,327

$7,8

88$7

,507

$8,2

34$9

,235

$8,7

27$8

,577

$7,7

73$7

,311

$6,9

58$6

,870

$6,1

56$6

,052

$5,8

20$5

,991

$5,6

15$6

,094

$5,9

14 $6,2

50$6

,269 $6

,530

$6,6

06$7

,063 $7

,323

$7,3

78$7

,297 $7

,670

$7,7

40$8

,443

$8,1

77 $8,5

07$8

,025

$8,5

63$8

,726

$8,6

46$8

,830

$8,6

46 $8,9

90$8

,647

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

1997

1999

1:01

1:03

2:01

2:03

3:01

3:03

4:01

4:03

5:01

5:03

6:01

6:03

7:01

7:03

8:01

8:03

9:01

9:03

10:0

1

10:0

3

No

-Fa

ult

Cla

im S

ev

eri

ty

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

No

-Fa

ult C

laim

Fre

qu

en

cy

Avg. Claim Severity

Frequency

About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse

No-Fault Claim Severity

Claim Severity reached a record high in 2010:Q2: $8,990

Avg. Claim Severity Rose 63% in 5 years

after 1997 Presbyterian

Decision

Avg. Claim Severity is up 54% since 2004:Q4

Financial Strength & Underwriting

32

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

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20098

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

7 65

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

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

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

5 of the 11 are Florida companies (1 of these

5 is a title insurer)

35

Reasons for US P/C Insurer Impairments, 1969–2008

38.1%

14.3%8.1%

7.6%

7.9%

7.0%

9.1%

4.2%

3.7%

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment 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

Profit Pillar #2PRICING

36

Pricing is Key to Profitability Trends in Personal and

Commercial

37

-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

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 0.8% through 10:Q3 vs. -4.5% through 09:Q3

38

Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2009

14.5%

-0.9%0.9%

9.2%

2.2%

5.7%

-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

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

39

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%

-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

The long-awaited uptick:

mainly personal lines

40

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.

41

Monthly Change* in Auto Insurance Prices, 1991–2010*

*Percentage change from same month in prior year; through December 2010; 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

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

Dec. 2010 change fell

to 4.4% from 5.4%

in Nov.

42

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

43

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

Profit Pillar #3INVESTMENTS

47

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting?

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

50

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

0.09% 0.14% 0.19% 0.29%0.62%

2.66%

3.29%

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

1.93%

0.99%

4.42%4.17%

0%

1%

2%

3%

4%

5%

6%

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

January 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 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

51

-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*

52*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

53

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.

Profit Pillar #4EXPENSES

55

Will Expense Ratios Fall As Premium Growth Turns Positive?

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

Profit Pillar #5LEVERAGE

59

Efficient Deployment of Capital Exerts a Significant Impact on

Profitability

61

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.

66

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

67

Capital Cycles Can Drive Consolidation

68

$0

$10

$20

$30

$40

$50

$60

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910E

Tra

ns

ac

tio

n V

alu

e

0

20

40

60

80

100

120

140

Nu

mb

er o

f Tra

ns

ac

tion

s

Transaction Value Number of Transactions

($ Billions)

Note: U.S. Company was the acquirer and/or target.

Source: Conning Research & Consulting. *2010E is derived from A.M. Best data for p/c insurers only (excludes brokers/agencies)

$ Value of Deals Down 78% in 2009, Volume Up 7%

2010: No Mega Deals, Despite Record Capital, Slow Growth and Improved

Financial Market Conditions

U.S. P/C Insurance-RelatedM&A Activity, 1988–2010E*

Secondary Profit PillarsOPERATING ENVIRONMENT

REGULATORY ENVIRONMENT

69

Many Other Factors Influence P/C Insurer Profitability

Shifting Legal Liability & Tort Environment

70

Is the Tort PendulumSwinging Against Insurers?

73

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

Inflation

92

Is it a Threat to Claim Cost Severities

93

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

1.61.9 2.0 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 2/11 (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

94

Excludes Food and Energy

Economic Drivers of P/C Insurance Exposures

95

Growth in the Wakeof the “Great Recession”

96

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/11; 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

%

3.2

%

3.5

%

3.4

%

3.5

%

3.5

%

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.

97

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

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/11; 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

.5%

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

98

Mountain, Plains states still growing the fastest

Some Southeast states growing well, but others

among the weakest

99

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 LLC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

100

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 LLC; 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

Premium growth in NY totaled 0.0% from

2004 through 2009

101

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

102

16.9

16.5

16.1

13.2

10.4

11.6

13.1 13

.9 14.7 15

.1

15.0 15

.5

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F

(Millions of Units)

Auto/Light Truck Sales, 1999-2016F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 2/11); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales in 2011

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2011-12 is

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

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

2011 and beyond

103

(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

7

0.8

9

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 2/11); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until 2012. 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

106

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. 107

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

108

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%*

111

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

112

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 9.4%

in December

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 16.1%

in December 2010

January 2000 through January 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

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

81

39

50

15

8

(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

Monthly Change in Private Employment

January 2008 through January 2011* (Thousands)

Private Employers Added 1.411 million Jobs in 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008

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

1.346 million for the year

113,000 private sector jobs were created in

December

115

US Unemployment Rate

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

%

9.5

%

9.4

%

9.2

%

9.0

%

8.8

%

8.6

%

8.5

%

8.3

%

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

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 (2/11); Insurance Information Institute

2007:Q1 to 2012:Q4F*

Unemployment forecasts remain stubbornly high

through 2011, but still imply millions of new

jobs will created.

117

Unemployment Rates by State, December 2010:Highest 25 States*

8.89.

59.

59.7

9.5

9.6

9.6

9.3

9.1

9.3

8.89.

4

9.0

9.19.4

10.611

.5

9.810

.110

.2

10.3

10.7

12.5

12.0

11.7

14.5

0

2

4

6

8

10

12

14

16

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

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for December 2010, seasonally adjusted.

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

In December, 31 states and DC reported unemployment rate decreases from a

year earlier, 16 states had increases and 3 had no change.

16 states + DC had unemployment rates above

the US average in Dec. 2010, 34 states were below.

118

6.7

6.4

6.3

5.8

6.8

6.87.

37.

4

4.44.6

5.5

7.07.2

3.8

6.4

8.1

8.2

7.5

7.57.

98.08.28.

5

8.5

8.38.

5

0

2

4

6

8

10

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

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, December 2010: Lowest 25 States*

*Provisional figures for December 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In December, state and regional unemployment rates were little changed.

Some 31 states and DC reported unemployment rate decreases from a

year earlier, 16 states had increases and 3 had no change.

NY’s unemployment rate in Dec. 2010 was 8.2%

123

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

124

$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

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*20??

US Insured Catastrophe Losses

*Estimate from Munich Re.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

First Half 2010 CAT

Losses Were Down 19% or $1.4B from

first half 2009

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

125

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

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 – 2010Number of Events (Annual Totals 1980 – 2010)

Source: MR NatCatSERVICE 126

There were a record 247 natural disaster events in

the US in 2010

For the second year in a row, insured losses due to

weather perils in the U.S. in 2010 were the highest on

record for a year without a hurricane landfall.

Insured Losses Due to Weather Perils in the U.S.: 1980 – 2010

Sources: MR NatCatSERVICE, Property Claims Services 127© 2011 Munich Re

(Tropical Cyclone, Thunderstorm, and Winter Storm only)

Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals)

134

Insured winter storm losses in 2010 are one of the top five in US history, totaling

$2.6 billion in 2010

U.S. Thunderstorm Loss Trends, 1980 – 2010 (Annual Totals)

Source: Property Claims Service, MR NatCatSERVICE 135

Thunderstorm losses in 2010 totaled $9.5 billion, the

3rd highest ever

Average thunderstorm losses have now quintupled since

the early 1980s

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss

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