Overview & Outlook for the P/C Insurance Industry: 2012 and Beyond MarketScout Entrepreneurial Insurance Symposium Dallas, TX September 12, 2012 Download at www.iii.org/presentations Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5520  Cell: 917.453.1885  [email protected]  www.iii.org

Presentation Outline  U.S. Economic Overview and Outlook  Economy as a Growth Engine for P/C Insurers  Labor Market Review

 Summary of P/C Financial Performance  Catastrophe Loss Developments & Trends  Global, US

 Will the Market Turn? Four Necessary Criteria:    

Underwriting Loss Trends Capital/Capacity Reinsurance Markets Pricing Discipline

 Analysis by Key Line  Other Contributing Factors to the Underwriting Cycle  Investment Environment  Tort/Casualty Environment  Inflation

 Q&A 2

Economics 2012: The World Is Changing 2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive Potentially Significant Benefits for P/C Insurers 3

Economic Outlook for 2012  Economic Growth Will Continue 2012/13, Albeit Modestly and Unevenly  No Double Dip Recession  Economy remains more resilient than most pundits presume

     

Consumer Confidence Could Ebb, But Won’t Collapse Consumer Spending/Investment Will Continue to Expand Modestly Consumer and Business Lending Continue to Expand Modestly Business Bankruptcies Fall, New Business Formations Grow Housing Market Remains Weak, but Some Improvement Expected by 2013 Inflation Remains Tame  Runaway inflation highly unlikely but energy spike possible; Fed has things under control

 Private Sector Hiring Remains Consistently Positive But Anemic  Unemployment is about 8.1% by year’s end

      

Sovereign Debt, Euro Currency/Economy, Muni Bond “Crises” Overblown European Recession in Milder than Commonly Presumed Soft Landing in China Threat from Oil Price Shock, Middle East Turmoil Has Subsided Interest Rates Remain Low by Historical Standards; Fear & Fed Factors Stock and Bond Market Stability Has Given Way to Fear Trading Congress & President Agree on Tax Cut Extensions Before Year-End 4

Insurance Industry Predictions for 2012  P/C Insurance Exposures Grow Modestly  Personal and commercial exposure growth is certain in 2012; Strongest since 2004/5  But restoration of destroyed exposure will take until mid-decade

 P/C Industry Growth in 2012 Will Be Strongest Since 2004  But growth not likely to exceed A.M. Best projection of +3.8% for 2012  No traditional “hard market” emerges in 2012

 Underwriting Fundamentals Deteriorate Modestly  Some pressure from claim frequency, in some severity in key lines

 Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures  Wage growth is also positive and could modestly accelerate  WC will prove to be tough to fix from an underwriting perspective

 Increase in Demand for Commercial Insurance Will Accelerate in 2012  Includes workers comp, property, marine, many liability coverages  Laggards: inland marine, aviation, commercial auto, surety  Personal Lines: Auto leads, homeowners lags (though HO leads in NPW growth due to rates)

 Investment Environment Is Remains Relatively Stable  Return of realized capital gains as a profit driver  Interest rates remain low

 Industry Capacity Hits New Records by Year-End 2012 (Barring Mega-CAT)

5

The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Will Expand Workers Comp Payroll Exposure Base America’s Manufacturing Renaissance? Construction Activity Still Depressed? 6

-5% -7%

1.4%

2.3% 2.2% 2.6% 2.4% 0.1% 2.5% 1.3% 4.1% 2.0% 1.7% 1.7% 1.9% 1.8% 2.4% 2.7% 2.9% 2012 is expected to see slow and choppy growth before accelerating modestly in 2013

-8.9%

2000 2001 2002 2003 2004 2005 2006 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

-9%

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway

-0.3%

-3%

-5.3%

-1%

-3.7%

1%

1.3%

3%

-1.8%

5%

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

1.1% 1.8% 2.5% 3.6% 3.1% 2.7% 0.5% 3.6% 3.0% 1.7%

7%

4.1%

Real GDP Growth (%)

5.0%

US Real GDP Growth*

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 * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 8/12; Insurance Information Institute.

7

Percent Change in Real GDP by State, 2011

Growth varied considerably across states but in total was weak in 2011 with US overall growth at just 1.7%

TX has been an economic growth leader Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute.

8

Consumer Sentiment Survey (1966 = 100)

69.9

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Jul-11

Jun-11

May-11

Apr-11

Mar-11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

May-10

Apr-10

Mar-10

Feb-10

40

Jan-10

45

Jul-10

50

Jun-10

Optimism among consumers Increased in August, and is well above year-ago levels; Suggests concern, but not fear on the part of consumers.

55

Nov-11

60

Oct-11

65

Sep-11

70

55.7 59.4 60.9 64.1

75

Aug-11

80

74.4 73.6 73.6 72.2 73.6 76 67.8 68.9 68.2 67.7 71.6 74.5 74.2 77.5 67.5 69.8 74.3 71.5 63.7

85

75.0 75.3 76.2 76.4 79.3 73.2 72.3 73.6

January 2010 through August 2012

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially in late 2011 and early 2012 Source: University of Michigan; Insurance Information Institute

9

Auto/Light Truck Sales, 1999-2022F

11.6

10.4

15.4

15.5

15.4

15.1

14.7

14.7

12.7

14.3

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is still far below 1999-2007 average of 17 million units, but a recovery is underway.

13.2

16.1

16.5

16.9

16.9

16.6

17.1

17.5

17.8

19 18 17 16 15 14 13 12 11 10 9

17.4

(Millions of Units)

Job growth and improved credit market conditions will boost auto sales in 2012 and beyond

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 1822F

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector. Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); Insurance Information Institute.

10

Monthly Change* in Auto Insurance Prices, 1991–2012* 10% 8%

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

Pricing peak occurred in 2010 at 5.1%, falling to 2.8% by Mar. 2012

6% 4% 2% 0%

“Hard” markets tend to occur during recessionary periods

The July 2012 reading of 3.4% was similar to the 3.3% recorded in July 2011

-2% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *Percentage change from same month in prior year; through July 2012; seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

11

1.9 1.7 1.5 1.3 1.1 0.9 0.7 0.5

The plunge and lack of recovery in homebuilding and in construction in general is holding back payroll exposure growth

0.55 0.59 0.61 0.75 0.89

2.1

New home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959

1.19 1.01 1.20 1.29 1.46 1.35 1.48 1.47 1.62 1.64 1.57 1.60 1.71 1.85 1.96 2.07 1.80 1.36 0.91

(Millions of Units)

1.34 1.23 1.32 1.38 1.42

New Private Housing Starts, 1990-2022F

Job growth, improved credit market conditions and demographics will eventually boost home construction

0.3 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F 16F17F 1822F

Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); Insurance Information Institute.

12

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

Aug-12

Jul-12

Jun-12

May-12

Mar-12 Apr-12

2/30/2102

5,515

5,514 5,514

5,510

5,542

5,563 5,549

5,564

5,546

5,520

5,528 5,519

5,498

5,508

5,498 5,495

5,495

5,496

5,489

5,477 5,456

5,488

5,499

5,492

Construction employment is still below where it was in Jan. 2010. In a normal recovery, construction employment would be growing robustly

Jan-12

Nov-11 Dec-11

Oct-11

Sep-11

Aug-11

Jun-11 Jul-11

May-11

Apr-11

Feb-11 Mar-11

Jan-11

Dec-10

Nov-10

Sep-10 Oct-10

5,500

Aug-10

5,650

5,491 5,511

5,507

5,518

5,552 5,559

(Thousands)

Jul-10

May-10 Jun-10

Apr-10

Mar-10

5,550 5,529

5,593

5,600

Feb-10

Jan-10

Construction Employment, Jan. 2010—August 2012*

5,450

5,400

13

Oil & Gas Extraction Employment, Jan. 2010—August 2012*

185

167

163

161

161

162

160

160

158

158

158

157

157

160

156

165

159

170

164

173

171

175

170

180

197

196

195

194

193

192

190

188

186

183

190

177

195

175

Oil and gas extraction employment is up 26.3% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in the US.

183

200

180

(Thousands)

155

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

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

2/30/2102

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

Aug-11

Jul-11

Jun-11

May-11

Apr-11

Mar-11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

Jan-10

150

14

Value of Construction Put in Place, June 2012 vs. July 2011* Growth (%)

Private: +15.0% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25%

Public: -0.7%

19.0% 15.0% 11.7%

9.3%

-0.2% Private sector construction activity is up in both the residential and nonresidential segments

Public sector construction activity remains depressed

-7.0%

-19.4% Total Construction

Total Private Residential-Construction Private

NonResidential-Private

Total Public Construction

ResidentialPublic

NonResidential-Public

Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue *seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

15

Value of Private Construction Put in Place, by Segment, June 2012 vs. July 2011* Growth (%)

Led by the Lodging and Power industries, Private sector construction activity is up by double digits in many segments after plunging during the “Great Recession” 35.7%

40% 30% 20% 15.0%

20.3%

19.0% 11.7%

20.6% 17.4%

17.9%

10.2%

10%

2.8% 3.4%

0% -10%

-7.2%

-4.6% -10.1% Manufacturing

Power

Communication

Transportation

Amusement & Rec.

Religious

Educational

Health Care

Commercial

Office

Lodging

Total Nonresidential

Residential

Total Private Construction

-20%

Private Construction Activity is Up in Most Segments, Including Residential Construction but Led by Power *seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

16

Value of Public Construction Put in Place, by Segment, June 2012 vs. July 2011* Growth (%)

Public sector construction activity is down substantially in many segments

15%

11.5% 7.8%

10% 5%

5.2%

2.6%

-0.2%

0% -5%

-2.1%

-10% -7.0% -15%

-2.8%

-3.3%

-5.5% -5.0%

-11.6%

-12.9%

-16.7% Water Supply

Sewage & Waste Disposal

Highway & Street

Power

Transportation

Amusement & Rec.

Public Safety

Educational

Health Care

Commercial

Office

Total Nonresidential

Total Public Construction

-25%

Residential

-19.4%

Conservation & Develop.

-20%

Public Construction Activity is Up Down in Many Segments as State, City and County Budgets Remain Under Stress *seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

17

ISM Manufacturing Index (Values > 50 Indicate Expansion)

50

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

Jun-11

May-11

Apr-11

Mar-11

Feb-11

Jan-11

Dec-10

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

40

Jan-10

45

Nov-10

Manufacturing activity contracted in June for the first time in nearly 3 years, but a resumption of expansion is possible Aug-11

55

51.4 52.5 52.5 51.8 52.2 53.1 54.1 52.4 53.4 54.8 53.5 49.7 49.8 49.6

60

Jul-11

65

58.3 57.1 60.4 59.6 57.8 55.3 55.1 55.2 55.3 56.9 58.2 58.5 60.8 61.4 59.7 59.7 54.2 55.8

January 2010 through August 2012

The manufacturing sector expanded for 34 consecutive months until June 2012 and added jobs. The question is whether this will continue. Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

18

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—July 2012 $ Millions $500,000

$400,000

ENERGY INTENSIVE The value of Manufacturing Shipments in July 2012 was up 32% to $479B from its June 2009 trough. June figure is only 1.3% below its previous record high in July 2008.

$300,000

Ja n92 Ja n93 Ja n94 Ja n95 Ja n96 Ja n97 Ja n98 Ja n99 Ja n00 Ja n 01 Ja n 02 Ja n 03 Ja n 04 Ja n 05 Ja n 06 Ja n 07 Ja n 08 Ja n 09 Ja n 10 Ja n 11 Ja n 12

$200,000

Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to July 2012 was 35%. Manufacturing is an energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages *seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 19

Manufacturing Growth for Selected Sectors, 2012 vs. 2011* Growth (%)

Non-Durables: +2.4%

Durables: +8.8% 25%

Manufacturing of durable goods has been especially strong in 2012

19.2%

20% 15% 10%

11.6%

11.4% 8.8% 5.3%

6.7%

6.1%

3.9%

5%

5.9% 5.0%

3.9% 2.4% 3.4%

0%

Textile Products

Plastics & Rubber

Petroleum & Coal

Food Products

Non-Durable Mfg.

Transportation Equip.

Electrical Equip.

Machinery

Fabricated Metals

Primary Metals

Wood Products

Durable Mfg.

All Manufacturing

Chemical

-0.5%

-5%

Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Energy Demand and Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages *Seasonally adjusted; Date are YTD comparing data through July 2012 to the same period in 2011. Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 20

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures March 2001 through July 2012

“Full Capacity”

The US operated at 79.3% of industrial capacity in July 2012, above the June 2009 low of 68.3% and tied for the highest level since April 2008

Percent of Industrial Capacity 82%

Hurricane Katrina

80% 78% 76%

The closer the economy is to operating at “full capacity,” the greater the inflationary pressure March 2001November 2001 recession

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.

Jun 12

Mar 12

Dec 11

Sep 11

Mar 11 Jun 11

Dec 10

Sep 10

Jun 10

Mar 10

Sep 09 Dec 09

Jun 09

Mar 09

Dec 08

Jun 08 Sep 08

Mar 08

Dec 07

Jun 07

Sep 07

Dec 06 Mar 07

Sep 06

Jun 06

Mar 06

Sep 04

Mar 04 Jun 04

Dec 03

Sep 03

Jun 03

Dec 02 Mar 03

Jun 02

Sep 02

Mar 02

Dec 01

Jun 01 Sep 01

Mar 01

66%

Jun 05

December 2007June 2009 Recession

68%

Sep 05 Dec 05

70%

Mar 05

72%

Dec 04

74%

21 21

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

Aug-12

Jun-12 Jul-12

Mar-12 Apr-12 May-12

11,970

11,962 11,985

11,942 11,955

11,860 11,890 11,932

11,780 11,808

11,768 11,777

11,768 11,771

Manufacturing employment is up by more than 500,000 or 4.6% since Jan. 2010—a surprising source of strength in the economy

Jan-12 2/30/2102

Nov-11 Dec-11

Aug-11 Sep-11 Oct-11

Jun-11 Jul-11

11,718 11,726 11,738

11,664 11,690

11,575 11,627

12,000

Apr-11 May-11

Feb-11 Mar-11

Nov-10 Dec-10 Jan-11

11,551 11,551 11,560

12,200

11,566 11,549

12,400

Sep-10 Oct-10

11,800

11,536 11,546

(Thousands)

Jul-10 Aug-10

Apr-10 May-10 Jun-10

11,470 11,502

11,458 11,462

11,600

Feb-10 Mar-10

Jan-10

Manufacturing Employment, Jan. 2010—August 2012*

11,400

11,200

11,000

22

ISM Non-Manufacturing Index (Values > 50 Indicate Expansion) January 2010 through August 2012

60

55

50.7 52.7 54.1 54.6 54.8 53.5 53.7 52.8 53.9 54.6 56 57.1 59.4 59.7 56.3 54.4 53.3 53.4 53.8 52.6 52.6 52.6 52.6 53.0 56.8 57.3 56.0 53.5 53.7 52.1 52.6 53.7

65

50

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

Aug-11

Jul-11

Jun-11

May-11

Mar-11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

40

Jan-10

45

Apr-11

Optimism among nonmanufacturers was stable in late 2011 and remained expansionary in 2012

Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue. Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.

23

Business Bankruptcy Filings, 1980-2012: Q1 90,000

60,000 50,000 40,000 30,000 20,000 10,000 0

1980-82 1980-87 1990-91 2000-01 2006-09

58.6% 88.7% 10.3% 13.0% 208.9%*

2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011

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:Q1

70,000

43,694 48,125

80,000

69,300 62,436 64,004 71,277 81,235 82,446 63,853 63,235 64,853 71,549 70,643 62,304 52,374 51,959 53,549 54,027 44,367 37,884 35,472 40,099 38,540 35,037 34,317 39,201 19,695 28,322 43,546 60,837 56,282 47,806 10,998

% Change Surrounding Recessions

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute

24

Private Sector Business Starts, 1993:Q2 – 2011:Q3* 230 220 210 200 190 180 170

Business Starts 2006: 872,000 2007: 843,000 2008: 790,000 2009: 697,000 2010: 722,000 2011: 748,000**

175 186 174 180 186 192 188 187 189 186 190 194 191 199 204 202 195 196 196 206 206 201 192 198 206 206 203 211 205 212 200 205 204 204 197 203 209 201 203 192 192 193 201 204 202 210 212 209 216 220 223 220 220 210 221 212 204 218 209 207 207 199 191 193 172 176 169 184 175 179 188 200 183 187 191

(Thousands)

Business starts were up 3.5% to 561,000 in the first 9 months of 2011 vs. first 9 months of 2011. 722,000 new business starts were recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new business starts since 1993

160 150 93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But Are Recovering Slowly * Data through June 30, 2011 are the latest available as of Sept. 12, 2012; Seasonally adjusted. **Annualized based on data through Q3:2011. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. 25

NFIB Small Business Optimism Index January 1985 through June 2012

Small business optimism has increased but is still only at the level it was when the Financial Crisis began

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

26

12 Industries for the Next 10 Years: Insurance Solutions Needed Health Care Health Sciences Energy (Traditional) Alternative Energy Petrochemical Agriculture Natural Resources

Technology (incl. Biotechnology)

Many industries are poised for growth, though insurers’ ability to capitalize on these industries varies widely

Light Manufacturing Insourced Manufacturing Export-Oriented Industries Shipping (Rail, Marine, Trucking)

27

Presidential Politics & the P/C Insurance Industry How Is Profitability Affected by the President’s Political Party?

28

P/C Insurance Industry ROE by Presidential Administration, 1950- 2012* 16.43%

Carter Reagan II

15.10%

G.W. Bush II

9.40%

Nixon

8.93% 8.65%

Clinton I G.H.W. Bush

OVERALL RECORD: 1950-2012* Democrats 7.67% Republicans 7.97%

8.35%

Clinton II

7.98%

Reagan I

7.68%

Nixon/Ford

6.98%

Truman

6.97%

Obama

6.65%

Eisenhower I

5.43% 5.03%

Eisenhower II G.W. Bush I

4.83%

Johnson

4.43%

Kennedy/Johnson

Party of President has marginal bearing on profitability of P/C insurance industry

3.55%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments. Estimated ROE for 2012 = 7.0%. Source: Insurance Information Institute

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012*

Clinton

Bush II

Obama

Reagan/Bush I

94 96

RED = Republican President

82 84

Nixon/Ford

Carter

Kennedy/ Johnson

20%

Truman

25%

Eisenhower

BLUE = Democratic President

15% 10% 5% 0%

*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0% Source: Insurance Information Institute

12E

08 10

02 04 06

98 00

90 92

86 88

78 80

74 76

70 72

66 68

60 62 64

56 58

52 54

50

-5%

Labor Market Trends Massive Job Losses Sapped the Economy and Commercial/Personal Lines Exposure, But Trend is Improving 31

Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling January 2000 through August 2012, Seasonally Adjusted (%) 18

U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 14.7% in Aug. 2012

Traditional Unemployment Rate U-3 Unemployment + Underemployment Rate U-6

16

Recession ended in November 2001

14 12

Unemployment kept rising for 19 more months

Recession began in December 2007

Unemployment stood at 8.1% in Aug. 2012

10

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

8 6

Peak rate in the last 30 years: 10.8% in November December 1982

4 2 Jan 00

Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan Aug 12 12

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving Source: US Bureau of Labor Statistics; Insurance Information Institute.

32

(600)

(800)

(1,000) Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period -734 -667 -806 -707 -744 -649 -452

-297 -215 -186 -262

-334

-161 -253 -230 -257 -347

(400)

-456 -547

(200) -14

-83

-12 -85 -58

-109

0 144

400

229 51 61 117 143 112 193 128 167 119 257 261 264 108 102 175 52 216 139 178 234 277 254 147 85 116 63 162 103

16 62

75

213

186

127

65 97 23

42 15

65

79

200

Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12

Monthly Change in Private Employment

January 2008 through August 2012 (Thousands)

103,000 private sector jobs were created in August

Private Employers Added 4.65 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 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 33

-4

-6

-8

-10 -0.074 -0.132 -0.293 -0.546 -0.776 -1.033 -1.380 -1.836 -2.383 -3.117 -3.784 -4.590 -5.297 -6.041 -6.690 -7.024 -7.476 -7.773 -7.988 -8.174 -8.436 -8.361 -8.444 -8.428 -8.366 -8.222 -7.993 -7.942 -7.881 -7.764 -7.621 -7.509 -7.316 -7.188 -7.021 -6.902 -6.645 -6.384 -6.120 -6.012 -5.910 -5.735 -5.683 -5.467 -5.328 -5.150 -4.916 -4.639 -4.385 -4.238 -4.153 -4.037 -3.974 -3.812 -3.709

-2 0.023 0.011

0

Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 MayJun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 MayJun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 MayJun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 MayJun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 MayJun-12 Jul-12 Aug-12

Millions

Cumulative Change in Private Employment: Dec. 2007—August 2012

December 2007 through August 2012 (Millions) 2

Cumulative job losses peaked at 8.444 million in December 2009

Cumulative job losses as of June 2012 totaled 3.709 million

All of the jobs “lost” since President Obama took office in Jan. 2009 have been recouped

Private Employers Added 4.74 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 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 34

Cumulative Change in Private Sector Employment: Jan. 2010—August 2012 4.632

4.735 Aug-12

4.470 Jun-12

Jul-12

4.407 May-12

4.206

4.059

3.805

3.528

3.294

3.116

2.977

2.761

2.534

2.432

2.060

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

Aug-11

Jul-11

Jun-11

May-11

Cumulative job gains through Aug. 2012 totaled 4.735 million

Mar-11

Feb-11

1.542 Jan-11

1.256 Nov-10

1.128 Oct-10

0.935 Sep-10

Aug-10

0.563 Jun-10

0.680

0.502 May-10

Jul-10

0.451

0.078

0.222 Mar-10

0.0

Feb-10

0.5

Jan-10 0.016

1.0

Apr-10

1.5

0.823

2.0

1.423

2.5

1.799

3.0

Apr-11

3.5

Dec-10

Millions

4.0

2.324

Job gains and pay increases have added more than $600 billion to payrolls since Jan. 2010

4.5

2.709

5.0

4.291

January 2010 through August 2012* (Millions)

Private Employers Added 4.74 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 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

35

Cumulative Change in Government Employment: Jan. 2010—August 2012 January 2010 through August 2012* (Millions)

Government at all levels has shed more than a half million jobs since Jan. 2010 even as private employers created 4.74 million jobs.

518

700

259

500

86

-8

0

40

100

109

300

-487

-504

Mar-12

Apr-12

Aug-12 -579

-483 Feb-12

Jul-12 -572

-488 Jan-12

Jun-12 -551

-486 Dec-11

-533

-475 Nov-11

May-12

-454

-427 Sep-11

Oct-11

-413 Aug-11

-446

-367 Jun-11

Jul-11

-349 May-11

-295 Apr-11

-230 Jan-11

-282

-221 Dec-10

Mar-11

-201 Nov-10

-267

-188 Oct-10

Feb-11

-212 Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

-700

Feb-10

-500

Temporary Census hiring distorted 2010 figures Jan-10

-300

Cumulative job losses through Aug. 2012 totaled 579,000

-70

-100

Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the Financial Crisis, Causing Them to Reduce Staff Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

36

Net Change in Government Employment: Jan. 2010—August 2012* (Thousands)

State government employment fell by 1.8% since the end of 2009 while Federal employment is down by 2.1%

0 -100

-92

-61

-200 -300 -400

-426

-500 -600

-579

Local government employment shrank by 426,000 from Jan. 2010 through Aug. 2012, accounting for 74% of all government job losses, negatively impacting WC exposures for those cities and counties that insure privately

-700 Total

Local

State

*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

Federal 37

Unemployment Rates by State, July 2012: Highest 25 States* In July, 44 states reported over-themonth unemployment rate increases, 2 states and the District of Columbia had decreases, and 4 states had no change.

7.6

7.7

8.2

8.3

8.3

8.3

8.3

8.3

8.4

8.5

8.5

8.7

7.9

8

8.8

8.9

8.9

9.0

9.1

9.1

9.3

9.6

9.6

10.7 9.8

10

10.8

Unemployment Rate (%)

12

12.0

14

6 4 2 0 NV RI CA NJ NC SC GA MS NY MI DC IL FL OR CT WA TN AL AZ CO KY US IN PA AK LA

*Provisional figures for July 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

38

3.0

4

4.0

4.4

4.9

5.0

5.3

5.4

5.6

5.8

5.9

6.1

6.0

6

6.3

6.4

6.6

6.8

7.0

7.2

7.2

7.2

7.3

7.3

7.4

7.5

In July, 44 states reported over-themonth unemployment rate increases, 2 states and the District of Columbia had decreases, and 4 states had no change. 6.4

Unemployment Rate (%)

8

7.6

Unemployment Rates by State, July 2012: Lowest 25 States*

2

0 ME ID WV AR WI MO OH TX MD DE NM HI MT KS MA UT VA MN WY NH IA VT OK SD NE ND *Provisional figures for July 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

39

US Unemployment Rate Forecast 2007:Q1 to 2013:Q4F*

8.0% 7.0% 6.0% 5.0%

Unemployment peaked at 10% in late 2009.

9.3% 9.6% 10.0% 9.7% 9.6% 9.6% 9.6% 8.9% 9.1% 9.1% 8.7% 8.3% 8.2% 8.2% 8.1% 8.0% 8.0% 7.9% 7.7%

9.0%

8.1%

10.0%

Rising unemployment eroded payrolls and workers comp’s exposure base. 4.5% 4.5% 4.6% 4.8% 4.9% 5.4% 6.1% 6.9%

11.0%

Jobless figures have been revised slightly upwards for 2012/13

Unemployment forecasts have been revised slightly upwards for 2012 and 2013. Optimistic scenarios put the unemployment as low as 8.0% by Q4 of this year.

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

4.0%

* = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/12 edition); Insurance Information Institute.

40

US Unemployment Rate Forecasts Quarterly, 2012:Q2 to 2013:Q4 10 Most Pessimistic Consensus/Midpoint 10 Most Optimistic

10.0% 9.5% 9.0% 8.5% 8.0%

8.3%

8.3%

8.3%

8.3%

8.2%

8.1% 8.0%

8.0%

8.0% 7.7%

7.9%

8.2% 8.1%

7.5% 7.0% 6.5%

7.6%

7.5%

Unemployment will remain high even under the most optimistic of scenarios, but forecasts are being revised downwards

8.1%

7.7% 7.3%

6.0% 12:Q3

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

Steadily Decreasing Unemployment Should Benefit the Workers Comp Exposure Base at Least Through 2013 Sources: Blue Chip Economic Indicators (8/12); Insurance Information Institute

41

Nonfarm Payroll (Wages and Salaries): Quarterly, 2005–2012:Q2 Billions $7,000

Latest (2012:Q2) was $6.89 trillion, a new peak--$640B above 2009 trough

Prior Peak was 2008:Q1 at $6.60 trillion

$6,750 $6,500

Pace of payroll growth is slowing in 2012

$6,250 $6,000 Recent trough (2009:Q3) was $6.25 trillion, down 5.3% from prior peak

$5,750

Growth rates in 2012 Q1:12 over Q4:11: 1.8% Q2 over Q1: 1.4%

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

12:Q2

12:Q1

11:Q4

11:Q3

11:Q2

11:Q1

10:Q4

10:Q3

10:Q2

10:Q1

09:Q4

09:Q3

09:Q2

09:Q1

08:Q4

08:Q3

08:Q2

08:Q1

07:Q4

07:Q3

07:Q2

07:Q1

06:Q4

06:Q3

06:Q2

06:Q1

05:Q4

05:Q3

05:Q2

05:Q1

$5,500

42

Payroll vs. Workers Comp Net Written Premiums, 1990-2012E Payroll Base* $Billions

$7,000 7/90-3/91

$6,000 $5,000 $4,000 $3,000

WC NWP $Billions

Wage & Salary Disbursements 3/01-11/01 WC NPW

12/07-6/09

WC premium volume dropped two years before the recession began

+9% in 2012E

$50 $45 $40

WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in 2005

$2,000

$35 $30 $25

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

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 *Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is 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.

43

POSITIVE LABOR MARKET DEVELOPMENTS

Key Factors Driving Workers Compensation Exposure

44

Mass Layoff Announcements, Jan. 2002—June 2012* 3,500

Mass layoff announcements peaked at more than 3,000 per month in Feb. 2009

3,000

There were 1,317 may layoffs announced in June 2012, close to pre-recession levels

2,500 2,000 1,500 1,000 500 '02

'03

'04

'05

'06

'07

'08

'09

'10

'11

*Seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

'12

45

Average Weekly Hours of All Private Workers, Mar. 2006—June 2012 (Hours Worked) 34.8 34.7 34.6 34.5 34.4 34.3

Hours worked plunged during the recession, impacting payroll exposures

34.2 34.1 34.0 33.9

Hours worked totaled 34.5 per week in June, still shy of the 34.6 hours typically worked before the “Great Recession”

33.8 33.7 33.6 33.5 '06

'07

'08

'09

'10

'11

'12

*Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

46

Average Hourly Wage of All Private Workers, Mar. 2006—June 2012 (Hourly Wage) $24.00 $23.00 $22.00

The average hourly wage was $23.50 in June, up 10.6% from $21.25 when the recession began in Dec. 2007

$21.00 $20.00

Wage gains continued during the recession, despite massive job losses

$19.00 $18.00 '06

'07

'08

'09

'10

'11

'12

*Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

47

ADVERSE LONG-TERM LABOR MARKET DEVELOPMENTS

Key Factors Harming Workers Compensation Exposure and the Overall Economy 48

Duration of Unemployment, June 2011 vs. June 2012 The plight of the longterm unemployed remains a serious issue for the US. Skills atrophy over time— impact on WC claim frequency/severity?

(Thousands) 7,000

June 2011

June 2012

6,000

-14.3% 6,263 5,370

5,000

-8.4%

4,000 3,068 3,000

2,810

-5.0% 2,976

2,826

-3.4% 1,874

2,000

1,811

1,000 0 Less Than 5 Weeks

5-14 Weeks

15-26 Weeks

27 Weeks +

Source: US Bureau of Labor Statistics at http://www.bls.gov/news.release/empsit.a.htm; Insurance Information Institute.

49

Labor Force Participation Rate, Jan. 2002—June 2012* Labor Force Participation as a % of Population 68

Labor force participation continues to shrink despite a falling unemployment rate

67 66 65

Large numbers of people are exiting (or not returning to the labor force

64 63 62 '02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

*Defined as the percentage of working age persons in the population who are employed or actively seeking work. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at http://data.bls.gov/timeseries/LNS11300000; National Bureau of Economic Research (recession dates); Insurance Information Institute.

50

Number of “Discouraged Workers,” Jan. 2002—June 2012 Thousands 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 '94

“Discouraged Workers” are people who have searched for work for so long in vain that they actually stop searching and drop out of the labor force

Large numbers of people are exiting (or not returning to) the labor force

There were 821,000 discouraged workers in June 2012

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

In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007). Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted. Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Ins. Info. Inst.

51

ADVERSE LONG-TERM LABOR MARKET DEVELOPMENTS

Key Factors Harming Workers Compensation Exposure and the Overall Economy 52

Duration of Unemployment, May 2011 vs. May 2012 The plight of the longterm unemployed remains a serious issue for the US. Skills atrophy over time— impact on WC claim frequency/severity?

(Thousands) 7,000

May 2011

May 2012

6,000

-12.8% 6,204 5,411

5,000

-4.0%

4,000 3,000

2,687

2,580

+3.1% 2,912

3,002

-16.6% 1,994

2,000

1,662

1,000 0 Less Than 5 Weeks

5-14 Weeks

15-26 Weeks

27 Weeks +

Source: US Bureau of Labor Statistics at http://www.bls.gov/news.release/empsit.a.htm; Insurance Information Institute.

53

Labor Force Participation Rate, Jan. 2002—May 2012* Labor Force Participation as a % of Population 68

Labor force participation continues to shrink despite a falling unemployment rate

67 66 65

Large numbers of people are exiting (or not returning to the labor force

64 63 62 '02

'03

'04

'05

'06

'07

'08

'09

'10

'11

*Defined as the percentage of working age persons in the population who are employed or actively seeking work. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

'12

54

Number of “Discouraged Workers,” Jan. 2002—May 2012 Thousands 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 '94

“Discouraged Workers” are people who have searched for work for so long in vain that they actually stop searching and drop out of the labor force

Large numbers of people are exiting (or not returning to) the labor force

There were 830,000 discouraged workers in May 2012

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

In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007). Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted. Sources: Bureau of Labor Statistics; National Bureau of Economic Research (recession dates).

55

Insurance Industry Employment Trends: 1990-2012 Insurance Information Institute August 2012

Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5520  Cell: 917.453.1885  [email protected]  www.iii.org

Overview of Insurance Sector Employment Changes* Insurance Subsector P-C Direct

May 2012 June 2012 Employment Employment 528,000 529,000

Change +1,000

Reinsurers

27,700

28,100

+400

Claims Adjusters

48,200

48,700

+500

Agents/Brokers

653,000

656,100

+3,100

Life Direct

336,400

337,900

+1,500

Health/Medical Direct

428,500

429,300

+800

70,900

70,500

-400

137,300

137,600

+300

54,400

54,500

+100

2,284,400

2,291,700

+7,300

Title & other Direct 3rd-Party Administration All other insurancerelated activities Net Total

*Data are through June 2012 and are preliminary (i.e., subject to later revision); not seasonally adjusted. 57

July 2012 Report: 1-Month and 12-Month Changes*  P-C Insurers  Employment up by 1,000 (+0.2%) vs. May 2012  Employment down by 3,800 (-0.7%) vs. June 2011

 Reinsurers  Employment up by 400 (+1.4%) vs. May 2012  Employment up by 1,900 (+7.3%) vs. June 2011

 Claims Adjusters  Employment up by 500 (+1.0%) vs. May 2012  Employment down by 1,500 (-3.0%) vs. June 2011

 Insurance Agents & Brokers  Employment up by 3,100 (+0.5%) vs. May 2012  Employment up by 7,000 (+1.1%) vs. June 2011

 Life Insurers  Employment up by 1,500 (+0.4%) vs. May 2012  Employment down by 3,200 (-0.9%) vs. June 2011

 Health/Medical Insurers  Employment up by 800 (+0.2%) vs. May 2012  Employment up by 800 (+0.2%) vs. June 2011 *Data are through June 2012 and are preliminary (i.e., subject to later revision). 58

Baselines: U.S. Employment Trends

59

U.S. Nonfarm Employment, Monthly, 1990–2012* Millions 140 135 130 125 120 115 110 105 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *As of July 2012; Not seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

60

U.S. Employment in Service Industries, Monthly, 1990–2012* Millions 120 115 110 105 100 95 90 85 80 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *As of July 2012; Not seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

61

Insurance Industry Employment Trends Soft Market, Difficult Economy, Outsourcing, Productivity Enhancements and Consolidation Have Contributed to Industry’s Job Losses 62

U.S. Employment in the Direct P/C Insurance Industry: 1990–2012* Thousands 540

This spurt results from 2010 census data and revised industry counts. BLS adjusted data for March 2010 through March 2011 but did not revise pre-March 2010 counts. Employment numbers prior to March 2011 are not comparable to subsequent data.

520

500

480

460

440 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *As of June 2012; Not seasonally adjusted; Does not including agents & brokers. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

63

U.S. Employment in the Direct Life Insurance Industry: 1990–2012* As of June 2012, Life insurance industry employment was down by 16,400 (-4.6%) to 337,900 since the recession began in Dec. 2007 (vs. overall US employment decline of 3.5%).

Thousands 575 550 525 500 475 450 425 400 375 350

Every 4-5 years BLS reconciles its data with census data; sometimes this reclassifies employment within industries. This drop, spread over March 2004-March 2005, moved some people to the Health/Medical Expense sector.

325 300 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *As of June 2012; Not seasonally adjusted; Does not including agents & brokers. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

64

U.S. Employment in the Direct HealthMedical Insurance Industry: 1990–2012* Thousands 450 425 400 375 350 325 300 275 250 225 200 175

As of June 2012, Health-Medical insurance industry employment was down by 12,600 or 2.9% to 429,300 since the recession began in Dec. 2007 (vs. overall US employment decline of 3.5%).

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *As of June 2012; Not seasonally adjusted; Does not including agents & brokers. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

65

U.S. Employment in the Reinsurance Industry: 1990–2012* Thousands 48 44 40

As of June 2012, US employment in the reinsurance industry was up by 1,200 or 4.5% to 28,100 since the recession began in Dec. 2007 (vs. overall US employment decline of 3.5%).

36 32 28 24 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *As of June 2012; Not seasonally adjusted; Does not including agents & brokers. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

66

U.S. Employment in Insurance Agencies & Brokerages: 1990–2012* Thousands 700

650

600

550

As of June 2012, employment at insurance agencies and brokerages was down by 23,500 or 3.5% to 656,100 since the recession began in Dec. 2007 (vs. overall US employment decline of 3.5%).

500 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *As of June 2012; Not seasonally adjusted. Includes all types of insurance. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

67

U.S. Employment in Insurance Claims Adjusting: 1990–2012* Thousands 60

Katrina, Rita, Wilma

55

50

As of June 2012, claims adjusting employment was down by 3,300 or 6.3% to 48,700 since the recession began in Dec. 2007 (vs. overall US employment decline of 3.5%).

45

*As of June 2012; Not seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Oct-11

Jan-11

Apr-10

Jul-09

Oct-08

Jan-08

Apr-07

Jul-06

Oct-05

Jan-05

Apr-04

Jul-03

Oct-02

Jan-02

Apr-01

Jul-00

Oct-99

Jan-99

Apr-98

Jul-97

Oct-96

Jan-96

Apr-95

Jul-94

Oct-93

Jan-93

Apr-92

Jul-91

Oct-90

Jan-90

40

68

U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2012* Thousands 145 135 125 115 105 95 85 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *As of June 2012; Not seasonally adjusted. Includes all types of insurance. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

69

P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 by High Catastrophe Loss & Other Factors 70

$10,141

$19,150

$3,043

$28,672

$35,204

$65,777 $44,155

$38,501

$30,029

$20,559

$20,598

$10,870

$3,046

$10,000

$19,316

$20,000

$5,840

$30,000

$14,178

$40,000

$21,865

$50,000

P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses

$30,773

$60,000

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:Q1 ROAS1 = 7.2%

$36,819

$70,000

       

$24,404

$80,000

$62,496

P/C Net Income After Taxes 1991–2012:Q1 ($ Millions)

$0 -$10,000

-$6,970 91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO, Insurance Information Institute

11 12:Q1

A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE 15.9%

110

A combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979 106.4

14.3% 12.7%

105 100.6 100

100.1

101.0

100.8

99.3

95.7

95

7.4%

92.7

8.8%

15%

10.9%

9.6%

97.5

18%

100.9

12% 97.6

7.6%

8.2%

9%

4.4% 4.6%

90

6%

Year Ago

85

3%

2011:Q1 = 102.2, 6.1% ROE

80

0% 1978

1979

2003

2005

2006

2007

Combined Ratio

2008

2009

2010

2011

2012:Q1

ROE*

Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q1* ROE

History suggests next ROE peak will be in 2016-2017

25%

1977:19.0%

1987:17.3%

20%

2006:12.7%

1997:11.6%

2012:Q 8.2%

15% 9 Years

10% 5%

2011: 4.6%*

0%

1975: 2.4%

1992: 4.5%

2001: -1.2%

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:

-5%

1984: 1.8%

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2012:Q1* (Percent)

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

20%

Katrina, Rita, Wilma

15%

10% Sept. 11

5%

0%

Hugo Lowest CAT Losses in 15 Years

Andrew Northridge

4 Hurricanes

Financial Crisis*

Record Tornado Losses

-5% 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:Q1

* Excludes Mortgage & Financial Guarantee in 2008 – 2012. 2012 Fortune 500 figure is III estimate. Sources: ISO, Fortune; Insurance Information Institute.

74

ROE vs. Equity Cost of Capital: U.S. P/C Insurance:1991-2011* (Percent) 18%

The P/C Insurance Industry Fell Well Short of Its Cost of Capital Every Year Since 2008

16% 14%

4% 2% 0%

US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from 1991 to 2002, but on Target or Better 2003-07, Fell Short in 2008-2010

-2.4 pts

-3.2 pts

-6.4 pts

-7.3 pts

6%

-9.0 pts

-13.2 pts

8%

+1.7 pts

10%

+2.3 pts

12%

The Cost of Capital is the Rate of Return Insurers Need to Attract and Retain Capital to the Business

-2% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10* 11* ROE

Cost of Capital

* Return on average surplus in 2008-2011 excluding mortgage and financial guaranty insurers. Source: The Geneva Association, Insurance Information Institute

75

Personal Lines Profitability Analysis Significant Variability Over Time and Across States 76

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*) Top 25 States

9.1

9.2

9.6

9.7

9.8

10.2

10.4

10.5

10.7

10.7

10.8

11.0

11.1

11.2

11.3

11.6

11.8

12.1

14.1

14.3

14.5

12.4

11.7

Hawaii was the most profitable state for auto insurers from 2001-2010

18.5

22 20 18 16 14 12 10 8 6 4 2 0

13.5

RNW PPA

(Percent)

HI VT ME ID DC NH ND MN SD OH KS NM CT IA RI OR WY VA AZ WI CA UT IN AL AK *Latest available. Sources: NAIC.

77

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*)

7.4 7.1

7.1

7.1 7.0

6.8

GA

TX

WV

OK

PA

MA

4

3.4 2.7

7.4

AR

4.2

7.4

MT

5.1

7.5 7.4

US

DE

7.6

MO

6

MS

7.8 7.7 TN

WA

8.0

8.8

SC

RNW Auto

8

Michigan was the least profitable state, in large part due to fraud in its no-fault system

MD

8.8

NY

8.5 8.4

9.0 8.9

10

Bottom 25 States

5.4 5.3

(Percent)

2

*Latest avaiiable. Sources: NAIC

MI-1.2

LA

FL

NV

KY

NC

NJ

IL

NE

-2

CO

0

78

Return on Net Worth: All P-C Lines vs. Homeowners, 1990-2010* (Percent) US All Lines 25% 20%

US Home

Average RNW: 1990-2009*

Impact of Hurricane Irene

All P-C Lines: 7.9% Homeowners: 3.5%**

15% 10% 5% 0% -5%

Texas “Mold” Crisis

Katrina, Rita, Wilma

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

Homeowners Insurance Is Considerably More Volatile than the Market Overall Due to Coastal Exposure and Interior Wind/Hail Events *Latest available. **Excluding Hurricane Andrew (1992); including 1992 produces an average homeowners RNW of 0.7%. Sources: NAIC.

79

Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*) Top 25 States

50

45.5

(Percent)

45

Hawaii was the most profitable state for home insurers from 2001-2010

40

9.4

11.2

12.2

12.5

12.5

12.7

12.7

13.1

14.0

14.6

16.5

17.6

18.1

18.0

18.4

18.6

19.5

15.3

10.5

10

15.4

15

19.0

20

20.3

25

20.6

30

22.3

RNW HO

35

5 0 HI SC RI AK CT DC NV DE NY UT MA OR NC CA WA NM VT ME PA ID NJ VA WY AZ MD *Latest available. Sources: NAIC.

80

Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*)

-8.6

-7.3 -8.3

-10.6 -11.1 -25.4 -29.2

Home insurance profitability in catastrophe prone states suffered the most over the past decade

-7.1 -7.2

-3.8 -4.4 -5.9 -7.1

0.4

3.4 1.0 0.9

6.4 5.0 4.8

8.0 8.0

9.2

-0.3 -2.6

RNW HO

15 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40

4.5 3.4

Bottom 25 States

(Percent)

NH CO MT MI US WV KS SD WI IL IA TX FL IN OH AR TN GA KY AL ND OK NE MN MO LA MS

*Latest available. Sources: NAIC

81

$879

$853

$849

$848

HI

ND

NE

NJ

$789

$880 US

IL

$881 MO

$794

$892 AK

$800

TN

$893

$970 SC

CO

$987 AL

$919

$991 KS

MN

$1,016 CT

$919

$1,021 NY

AR

$1,035 MA

$922

$1,069 RI

$1,000

CA (4)

$1,069

$1,200

DE

$1,400

$1,123

$1,430 LA

$1,185

$1,460

Top 25 States

FL (3)

$1,600

$1,511

Average Premiums For Home Insurance By State, 2009* (1)

$600 $400

OK

MS

$0

TX (2)

$200

*Latest available. (1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling. Source: NAIC; Insurance Information Institute. 82

Average Premiums For Home Insurance By State, 2009* (1)

$544

$544

$542

OR

UT

WI

$485

$552

$600

WA

$610 DC

$694 PA

$613

$703 NV

OH

$711 KY

$642

$717 VT

AZ

$717 IN

$645

$725 NC

SD

$727 WY

$645

$734 VA

IA

$740 MI

$651

$751 NM

ME

$751 MT

$671

$757

$779 MD

NH

$787

$800

GA

Bottom 25 States

$400

ID

$0

WV

$200

(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling. Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

83

1.09%

1.09%

1.10%

1.12%

1.13%

1.13%

1.16%

1.17%

1.19%

1.21%

1.23%

1.24%

1.27%

1.28%

1.28%

1.42%

1.56%

1.57%

1.72%

1.45%

1.50%

2.16%

1.78%

2.00%

Top 25 States 2.16%

2.50%

2.28%

(Percent)

2.35%

Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009

1.00% 0.50% 0.00% TX FL MS LA OK AR AL SC KS NM MO TN DC NY RI NE CA US GA KY WV MT MN NC ND *Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

84

Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009 (Percent)

Bottom 25 States

1.50%

1.00%

1.08% 1.05% 1.05% 1.05% 1.03% 1.03% 1.01% 1.00% 0.99% 0.97% 0.97% 0.97% 0.96% 0.93% 0.88% 0.87% 0.86% 0.86% 0.86% 0.86% 0.85% 0.80% 0.79% 0.77% 0.76% 0.71% 0.68%

2.00%

WA

WI

OR

MD

UT

ID

NJ

NH

VA

OH

DE

IA

PA

VT

SD

ME

WY

AZ

IL

CT

NV

MA

HI

MI

IN

AK

0.00%

CO

0.50%

*Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

85

Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009

1.03%

1.04%

1.04%

1.05%

1.06%

1.08%

1.11%

1.11%

1.11%

1.11%

1.19%

1.22%

1.23%

1.27%

1.28%

1.35%

1.35%

1.36%

1.57%

1.59%

1.29%

1.02%

1.00%

1.37%

1.50%

1.66%

2.00%

1.34%

Top 25 States

(Percent)

0.50%

0.00% LA DC FL WV NV NM MS TX MI NY AZ AR DE SC KY RI GA NJ OK AK US UT AL PA TN *Average auto insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

86

Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009 (Percent)

Bottom 25 States

2.00%

1.00%

1.02% 1.01% 0.98% 0.97% 0.97% 0.94% 0.92% 0.92% 0.92% 0.91% 0.91% 0.91% 0.90% 0.89% 0.86% 0.86% 0.85% 0.84% 0.83% 0.83% 0.81% 0.80% 0.78% 0.78% 0.78% 0.72% 0.65%

1.50%

ND

IA

WI

SD

VA

NE

NH

MN

WY

VT

KS

MA

OH

ME

CO

IN

IL

MD

NC

ID

HI

CT

CA

MO

MT

OR

0.00%

WA

0.50%

*Average auto insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

87

Global Catastrophe Loss Developments and Trends 2011 Rewrote Catastrophe Loss and Insurance History But Will Losses Turn the Market? 88

Global Catastrophe Loss Summary: 2011  2011 Was the Highest Loss Year on Record for Economic Losses Globally  Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss

 $380 Billion in Economic Losses Globally (New Record)  New record, exceeding the previous record of $270B in 2005

 $105 Billion in Insured Losses Globally  2011 losses were 2.5 times 2010 insured losses of $42B  Second only to 2005 on an inflation adjusted basis (new record on a unadjusted basis)  Over 5 times the 30-year average of $19B

 $72.8 Billion in Economic Losses in the US  Represents a 129% increase over the $11.8 billion amount through the first half of 2010

 $35.9 Billion in Insured Losses in the US Arising from 171 CAT Events  Fifth highest year on record  Represents 51% increase over the $23.8 billion total in 2010 Source: Munich Re; Insurance Information Institute.

89

Natural Loss Events, 2011 World Map Winter Storm Joachim France, Switzerland, Germany, 15–17 Dec.

Wildfires Canada, 14–22 May Severe storms, tornadoes USA, 20–27 May Hurricane Irene USA, Caribbean 22 Aug.–2 Sept. Floods USA, April–May Drought Severe storms, tornadoes USA, Oct. 2010– USA, 22–28 April ongoing

Flash floods, floods Italy, France, Spain 4–9 Nov. Earthquake Turkey 23 Oct. Earthquake, tsunami Japan, 11 March

Wildfires USA, April/Sept.

Floods Pakistan Aug.–Sept.

Floods, flash floods Australia, Dec. 2010–Jan. 2011

Landslides, flash floods Brazil, 12/16 Jan.

Natural catastrophes Selection of significant loss events (see table) Source: MR NatCatSERVICE

Cyclone Yasi Australia, 2–7 Feb. Floods Thailand Aug.–Nov.

Floods, landslides Guatemala, El Salvador 11–19 Oct.

Number of Events: 820

Tropical Storm Washi Philippines, 16–18 Dec.

Drought Somalia Oct. 2010–Sept. 2011

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

Earthquake New Zealand, 22 Feb. Earthquake New Zealand, 13 June

Hydrological events (flood, mass movement) Climatological events (extreme temperature, drought, wildfire) 90

Natural Catastrophes Worldwide, 2011 Overview and Comparison with Previous Years

Number of events Overall losses in US$ m

2011

2010

Average of the last 10 years 2001-2010

Average of the last 30 years 1981-2010

Top Year 19812010

820

970

790

630

2007 (1,025)

380,000

152,000

113,000

75,000

2005 (227,000)

105,000

42,000

35,000

19,000

2005 (101,000)

27,000

296,000

106,000

69,000

2010 (296,000)

(original values)

Insured losses in US$ m (original values)

Fatalities

Source: MR NatCatSERVICE

© 2011 Munich Re

91

5 Costliest Natural Catastrophes Worldwide in Terms of Insured Losses, 2011 ($Mill)

Fatalities

Overall losses US$ m

Insured losses US$ m

Date

Region

Event

March 11

Japan

Earthquake, tsunami

15,840

210,000

35,00040,000

Feb. 22

New Zealand

Earthquake

181

16,000

13,000

Aug. 1 – Nov. 15

Thailand

Floods, landslides

813

40,000

10,000

Apr. 22-28

USA

Severe storms/ tornadoes

350

15,000

7,300

Aug. 22 Sep. 2

USA, Caribbean

Hurricane Irene

55

15,000

7,000

Source: MR NatCatSERVICE

© 2011 Munich Re

92

Natural Catastrophes Worldwide 2011 Insured losses US$ 105bn - Percentage distribution per continent

2%

44%

In 2011, just 37% of insured natural catastrophe losses were in the Americas, barely half the average of 66% over the prior 30 years (1981-2010) Continent America (North and South America) Europe Africa

37%