Global Economic Growth, P/C Exposure Trends, Employment

and Low Interest Rates: P/C Insurance Markets in a

Challenging WorldInsurance Information Institute

March 9, 2012Robert 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

U.S. and Global Economic Overview and Outlook Economy as a Growth Engine for P/C (Re)Insurers Exposure Analysis Geopolitical Instability: An Economic Threat Labor Market Review

Investment Income: The New Reality of Persistently Low Yields Have Insurers Adapted to the New Reality? Quantification of Impact

Workers Compensation Underwriting Challenges Low Yield Impacts on a Long-Tail Line

Q&A

3

Economics 2012:

The World Is Changing2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive

Potentially Enormous Benefits for P/C Insurers

3

4

Global Economic Outlook for 2012-2013

Economic Growth Will Accelerate Modestly in 2012/13, Beating Expectations No Double Dip Recession Economy remains more resilient than most pundits presume

Consumer Confidence Will Continue to Improve Consumer Spending/Investment Will Continue to Expand Consumer and Business Lending Continue to Expand Housing Market Remains Weak, but Some Improvement Expected in 2012 Inflation Remains Tame

Runaway inflation highly unlikely but energy spike possible; Fed has things under control Private Sector Hiring Remains Consistently Positive, Exceeds Expectations

Unemployment dips below 8% by Q3 2012 Sovereign Debt, Euro Currency/Economy, Muni Bond “Crises” Manageable European Recession is Milder than Commonly Presumed Soft Landing in China Higher Oil Prices and Current Middle East Turmoil Pose Greater Risk to US Economy than in

2011: Threat of Israeli Attack on Iran Is High in 2012 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End Stock and Bond Markets More Stable, Less Volatile Political Environment Is More Hospitable to Business Interests Obama Gains Re-Election Edge from Improving Economy

5

P/C Insurance Exposures Grow Robustly Personal and commercial exposure growth is certain in 2012; Strongest since 2004 But restoration of destroyed exposure will take until mid-decade

P/C Industry Growth in 2012 Will Be Strongest Since 2004 Growth 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, severity in some 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 & industries like energy, ag Laggards: surety, construction business Personal Lines: Auto leads, homeowners lags (though HO leads in NPW growth due to rates)

Investment Environment Is/Remains Much More Favorable Return of realized capital gains as a profit driver Interest rates remain low; Some upward pressure if economic strength surprises

Industry Capacity Hits a New Record by Year-End 2012 (Barring Mega-CAT) or Significant Market Turmoil

Insurance Industry Predictions for 2012

Economic Outlook: US and Global Perspectives

6

Strength of Economies Around the World Will Influence P/C Insurer and Reinsurer

Growth Opportunities

6

7

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/12; 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%

3.9

%3

.8%

2.5

%2

.3%

0.4

%1

.3%

1.8

% 3.0

%2

.1%

2.2

%2

.4%

2.6

%2

.5%

2.7

%2

.9%

3.0

%4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   2

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00

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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%

2012 is expected to see a steady

acceleration in growth continuing into 2013

8

Real GDP Growth Forecasts: US and Major Trading Economies: 2011 – 2012F

Sources: Blue Chip Economic Indicators (2/2012 issue); Insurance Information Institute.

1.7%

0.9% 1.

6%

3.0%

7.0%

2.4%

4.0%

2.2%

1.4%

0.4%

8.2%

1.8%

7.1%

2.0%

3.3%

9.2%

-0.8%-0.4%

-2%

0%

2%

4%

6%

8%

10%

US UK EuroArea

Germany China Japan India Canada Mexico

2011 2012F

Growth Prospects Vary Widely by Region: Brightening in the US, Mild Recession in the Eurozone, A “Soft Landing” in China, Strength in

India, Reconstruction Stimulus in Japan and Modest Growth in America’s Largest Trading Partners—Canada and Mexico.

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

F1

3F

Advanced economies Emerging and developing economies World

Source: International Monetary Fund, World Economic Outlook Update, Jan. 2012; Ins. Info. Institute.

Emerging economies (led by China) are expected to grow by 5.4% in 2012 and

5.9% in 2013.

GDP Growth: Advanced & Emerging Economies vs. World, 1970-2013F

Advanced economies are expected to grow at a sluggish pace of 1.2% in

2012 and 1.9% in 2013.

World output is forecast to grow by 3.3% in 2012 and 3.9% in 2013. The world economy shrank by 0.6% in

2009 amid the global financial crisis

GDP Growth (%)

10

Global Real (Inflation Adjusted) NonlifePremium Growth: 1980-2010

Source: Swiss Re, sigma, No. 2/2011.

Nonlife premium growth in emerging markets has

exceeded that of industrialized countries in

27 of the past 31 years, including the entirety of the

global financial crisis..

Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as

well as a lack of consistent cyclicality

Average: 1980-2010

Industrialized Countries: 3.8%

Emerging Markets: 9.2%

Overall Total: 4.2%

11

Nonlife Real Premium Growth in 2010

Source: Swiss Re, sigma, No. 2/2011.

Latin and South American markets performed

relatively well during and after the global financial crisis in terms of growth

There was also growth in the Middle East, East and South Asia as well as Australia and New

Zealand

12

Political Risk in 2011: Greatest Business Opportunities Are Often in Risky Nations

Source: Maplecroft

The fastest growing markets are generally

also among the politically riskiest

Heightened risk has economic and insurance implications

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

55

.7 59

.4 60

.9 64

.1

69

.9

75

.0

75

.3

40

45

50

55

60

65

70

75

80

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Consumer Sentiment Survey (1966 = 100)

January 2010 through February 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

Optimism among consumers is recovering, in part due to an

improving jobs outlook, after plunging amid the debt debate debacle and S&P downgrade

13

14

16.9

16.5

16.1

13.2

10.4

11.6 12

.7

14.0 14

.6

14.7 15

.1

15.4

15.5

15.4

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 11 12F 13F 14F 15F 16F 17F 18-22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2022F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 2/12); Insurance Information Institute.

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

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.

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

2012 and beyond

15

(Millions of Units)

New Private Housing Starts, 1990-2022F

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

1 0.7

2 0.8

8

1.3

4

1.2

3

1.3

2

1.3

81

.42

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 11 12F13F14F15F16F17F 18-22F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 2/12); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. 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

The plunge and lack of recovery in homebuilding and in construction in general

is holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

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

51

.4 52

.5

52

.5

51

.8

52

.2 53

.1 54

.1

52

.4

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through February 2012

The manufacturing sector has been expanding and adding jobs. The question is whether this will continue.

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

Optimism among manufacturers was

increasing in late 2011 and into early 2012

16

17

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Jan. 2012

*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to December 2011 was 30.2%. This growth leads to gains in many commercial exposures: WC, Commercial Auto,

Property and Various Liability Coverages

The value of Manufacturing Shipments in Dec. 2011 was up 30.2%

to $464B from its May 2009 trough. Dec. figure is only 4.5% below its previous record high in July 2008.

$ Millions

17

18

Manufacturing Growth for Selected Sectors, Jan. 2012 vs. Jan. 2011

13.4%

7.1% 7.5%10.9%

5.2%8.8%8.4%

10.1%

31.2%

10.1%

5.8%

0%

5%

10%

15%

20%

25%

30%

35%

All

Ma

nu

fact

uri

ng

Du

rab

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er

Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial

Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods has been

especially strong

*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +10.1% Non-Durables: +7.1%

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Jun 0

1

Sep 0

1

Dec 0

1

Mar

02

Jun 0

2

Sep 0

2

Dec 0

2

Mar

03

Jun 0

3

Sep 0

3

Dec 0

3

Mar

04

Jun 0

4

Sep 0

4

Dec 0

4

Mar

05

Jun 0

5

Sep 0

5

Dec 0

5

Mar

06

Jun 0

6

Sep 0

6

Dec 0

6

Mar

07

Jun 0

7

Sep 0

7

Dec 0

7

Mar

08

Jun 0

8

Sep 0

8

Dec 0

8

Mar

09

Jun 0

9

Sep 0

9

Dec 0

9

Mar

10

Jun 1

0

Sep 1

0

Dec 1

0

Mar

11

Jun 1

1

Sep 1

1

Dec 1

1

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. 19

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 78.5% of industrial capacity in Jan. 2012, above the June 2009

low of 68.3% and close to its post-crisis peak

December 2007-June 2009 Recession

March 2001 through January 2012

19

50

.7 52

.7 54

.1

54

.6

54

.8

53

.5

53

.7

52

.8 53

.9

54

.6 56 5

7.1 5

9.4

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

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through February 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.

Optimism among non-manufacturers was

stable in late 2011 and increased in early 2012

20

21

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

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40,0

9938

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35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8247

,806

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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

Business Bankruptcy Filings,1980-2011

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 as Business Bankruptcies Begin to Decline

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.

% Change Surrounding Recessions

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

21

22

Private Sector Business Starts, 1993:Q2 – 2011:Q2*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

119

219

219

320

1 204

202

210 21

220

921

6 220 22

322

022

021

022

121

220

421

820

920

720

719

919

1 193

172 17

616

918

417

5 179

188

200

183 18

7

203

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 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 March 7, 2012; Seasonally adjusted.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 4.5% to 370,000 in the first half of 2011 vs. first half 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

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 740,000**

22

23

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking)

24

Labor Market Trends

Employment and Payroll Trends Have Significant Direct and Indirect

Impacts on P/C Insurance Exposures

24

25

Unemployment and Underemployment Rates: Stubbornly High in 2011, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 8.3% in February 2012

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 14.9%

in Feb. 2012

January 2000 through February 2012, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

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

25

Feb 12

186

7921

365

127

42 15-1

09-1

465

9723

-12

-85 -58

-161

-253 -230

-257

-347

-456

-547

-734 -6

67-8

06-7

07-7

44-6

49-3

34-4

52-2

97-2

15 -186

-262

75-8

316

62

229

51 6111

714

311

2 193

128 16

711

925

726

126

410

810

2 175

5221

613

9 178 23

4 285

233

144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

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ct-1

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1D

ec-1

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n-12

Feb

-12

Monthly Change in Private Employment

January 2008 through February 2012* (Thousands)

Private Employers Added 4.046 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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

233,000 private sector jobs were created in

February

26

0.02

30.

011

-0.0

74-0

.132

-0.2

93-0

.546

-0.7

76-1

.033

-1.3

80-1

.836

-2.3

83-3

.117

-3.7

84-4

.590

-5.2

97-6

.041

-6.6

90-7

.024

-7.4

76-7

.773

-7.9

88-8

.174

-8.4

36-8

.361

-8.4

44-8

.428

-8.3

66-8

.222

-7.9

93-7

.942

-7.8

81-7

.764

-7.6

21-7

.509

-7.3

16-7

.188

-7.0

21-6

.902 -6.3

84-6

.120

-6.0

12-5

.910

-5.7

35-5

.683

-5.4

67-5

.328

-5.1

50-4

.916

-4.6

31-4

.396

-6.6

45

-10

-8

-6

-4

-2

0

2

Dec

-07

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12F

eb-1

2

Mill

ion

sCumulative Change in Private Employment: Dec. 2007—Feb. 2012

December 2007 through February 2012* (Millions)

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

Cumulative job losses peaked at 8.444 million

in December 2009

Cumulative job losses as of Feb. 2012 totaled

4.398 million

27

All of the jobs “lost” since President

Obama took office in Jan. 2009 have been

recouped

Private Employers Added 4.046 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)

28

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2011:Q4

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

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,75005

:Q1

05:Q

2

05:Q

3

05:Q

4

06:Q

1

06:Q

2

06:Q

3

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

Peak was 2008:Q1 at $6.60 trillion

Latest (2011:Q4) was $6.71 trillion,

a new peak

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

5.3% from prior peak

Growth rates in 2011Q2 over Q1: 0.6%

Q3 over Q2: 0.4% Q4 over Q3: 1.0%

Pace of payroll growth is

accelerating

28

Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)

*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).

-4.4%

-2.0%-1.1%

1.1%

3.7%4.6%

8.5%

3.5%

2.1%

-0.5%

-3.6%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

Recessions in the 1970s and 1980s saw smaller exposure impacts

because of continued wage inflation, a factor not present

during the 2007-2009 recession

The Dec. 2007 to mid-2009 recession

caused the largest impact on WC

exposure in 60 years

(Percent Change)

(All Post WWII Recessions)

Recession Dates (Beginning/Ending Years)

30

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

%

8.9

%

9.1

%

9.1

%

8.7

%

8.4

%

8.3

%

8.2

%

8.1

%

8.0

%

7.9

%

7.8

%

7.7

%

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

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 (2/12 edition); Insurance Information Institute (forecasts)

2007:Q1 to 2013:Q4F*

Unemployment forecasts have been revised

downwards for 2012 and 2013. Optimistic scenarios

put the unemployment as low as 7.7% by Q4 of this year.

Jobless figures have been revised

downwards for 2012

INVESTMENTS: THE NEW REALITY

31

How Much of a Threat Are Persistently Low Interest Rates for P/C Insurers?

31

32

Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment

No Expectation that Rates Would Be:Pushed to Such Low Levels

Pushed Down so Rapidly

Held to Such Low Levels for So Long

Suppressed via Unprecedented Aggressiveness of the Federal Reserve– Use of traditional and unconventional tools (QE)– Unconventional ’s policies couldn’t be anticipated, esp. QE1, 2

(3?)

Competitive PressureProtracted Soft MarketRelease of Prior Year Reserves Eases UrgencyRealization of Capital Gains

Property/Casualty Insurance Industry Investment Income: 2000–2013F1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.2 $46.3 $45.5 $46.4

$39.6

$49.5

$52.3

$30

$40

$50

$60

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

Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates

1 Investment gains consist primarily of interest and stock dividends.*2011E figure is annualized based on actual investment income through 2011:Q3; 2012F-201F based on Conning projections.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.

($ Billions)

Investment earnings in 2011 are estimated to be about 15% below their 2007 pre-crisis peak

34

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*

*Monthly, through February 2012. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txt National Bureau of Economic Research (recession dates); Blue Chip Economic Indicators (2/12); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Yields on 10-Year U.S. Treasury Notes have been essentially

below 5% for nearly a decade.

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

Yields on 10-Year U.S. Treasury Notes have

been essentially below 4% since January 2008.

34

History/Forecast

2008: 3.7% 2009: 3.2% 2010: 3.2% 2011: 2.8% 2012F: 2.2% 2013F: 2.9%

Yield on 10-Year Note expected to

trough in 2012

35

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Feb. 2012

0.06% 0.09% 0.12% 0.16% 0.28%

1.37%

1.97%

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

0.83%

0.38%

3.11%2.75%

0%

1%

2%

3%

4%

5%

6%

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

February 2012 Yield CurvePre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level

in at least 45 years. Investment income will fall as

a result. Fed is unlikely to hike rates until well into 2014.

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through Late 2014

Source: Federal Reserve Board of Governors; Insurance Information Institute.

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

Combined Ratio / ROE

* 2008 -2010 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011-12 combined ratios are A.M. Best estimate excl. M&FG insurers. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.8102.0

107.5

95.7

6.1%

3.9%

7.5%7.4%4.4%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011E 2012F0%

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

36

Property/Casualty Insurance Industry Investment Gain: 1994–2013F1

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$52.9$53.6$51.3$53.0

$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 11E* 12F 13F

Investment Gains in 2011 Were Surprisingly Robust. Investment Gains Recovered Significantly Due to Realized Investment Gains; The Financial

Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2011 figure is annualized based 2011:Q3 actual; 2012-13F derived from

Conning forecast data.Sources: ISO; Conning; Insurance Information Institute.

($ Billions)

Total investment gains are expected to remain stable but still 18% to 20% below their pre-crisis peak through 2013

37

38

P/C Insurer Net Realized Capital Gains/Losses, 1990-2013F

*2011 is an estimate based on annualized actual 2011 9-month figure of $5.5B; 2012F and 2013F are Conning estimates.Sources: A.M. Best, ISO, Conning; Insurance Information Institute.

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

98

-$5.

70

$7.3

0

$6.0

0

$6.6

0

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

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

Insurers Posted Net Realized Capital Gains in 2011 for the First Time Since 2007. Realized Capital Losses Were a Primary Cause

of 2008/2009’s Large Drop in Profits and ROE

($ Billions)Realized capital gains returned in

2011 but are generally smaller than immediate pre-crisis era or 1990s

38

$13B (est.) net swing in 2011

39

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

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

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

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

39

Underwriting Gain (Loss)1975–2011*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011*

Cumulative underwriting deficit from 1975 through

2010 is $455B

($ Billions)Underwriting losses in

2011 at $34.9

through Q3 will be

largest since 2001

40

41

2

(2)

(8)

(3)

(7)(10) (10)

(4)

(0)

11

24

15

119

(5)

(9)

(14)

(10) (11)(7)

(5)(2)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

E

12

F

13

F

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2013F

Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to

Further Diminish in 2012 and 2103Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best.

Prior year reserve releases totaled $8.8

billion in the first half of 2010, up from

$7.1 billion in the first half of 2009

Workers Compensation: Vulnerability to Low Yield Interest

Rate Environment

42

Low Yields Compound a Workers Comp Market Already Suffering from Poor Underwriting Results and Still-Weak

Labor Markets

42

Workers Compensation Combined Ratio: 1994–2013F

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

3.6

10

4.4 1

10

.6 11

6.8

11

8.5

12

0.5

11

7.012

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 10 11P 12F 13F

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best (1994-2012F); Conning (2013F) ; Insurance Information Institute. 43

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

44

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2011

*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2011 is I.I.I. estimateSources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Resumption of payroll growth and rate increases suggests WC NWP will grow again in 2012

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

Workers CompensationInvestment Returns

45

Percent

Calendar Yearp=Preliminary

Source: 1990–2009, Annual Statement Data; 2010p, NCCIInvestment Gain on Insurance Transactions includes Other Income•Adjusted to include realized capital gains to be consistent with 1992 and afterSource: NCCI

Average (1990–2009): 14.6%

Investment Gain on Insurance Transactions-to-Premium RatioPrivate Carriers

Calendar Year

Workers Compensation ResultsModest Operating Loss

46

Percent

Calendar Yearp Preliminary

Source: 1990–2009, Annual Statement Data; 2010p, NCCIOperating Gain Equals 1.00 minus (Combined Ratio Less Investment Gain on Insurance Transactions and Other Income)•Adjusted to include realized capital gains to be consistent with 1992 and afterSource: NCCI

Average (1990–2009): 6.3%

Pre-Tax Operating Gain RatioPrivate Carriers

47

$5,707

$7,163

$7,862

$8,814 $8,893

$7,913 $7,954

$7,615

$7,093 $7,18813.0%

16.1%

24.0%

22.0%20.6%

17.4%

16.9%

18.7%

22.5%22.3%

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

04 05 06 07 08 09 10 11E 12F 13F

(In

ve

stm

en

t In

co

me

$ M

ill)

0%

5%

10%

15%

20%

25%

30%

Inv

es

tme

nt In

co

me

Ra

tio

Investment Income

Investment Income Ratio

Source: Conning. Note: Investment Income Ration is ratio of investment income from WC reserves and surplus to WC net earned premium.

Workers Comp Investment Income Earned and Investment Income Ratio, 2004-2013F

Restoring the Workers Comp Line to Profitability Will Be Made More Difficult Because Investments Will Provide Little Lift, Requiring More of

an Emphasis on Underwriting Profitability

In 2012, investment income attributable to the WC line is projected to be 20% below its 2008 peak, and pushing the

investment income ratio down to 18.7% or Net Earned Premium

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Thank you for your timeand your attention!

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48