Is the World Becoming a Riskier Place?a Riskier Place? · 2014. 6. 13. · Record Tornado,,g ,...

Is the World Becominga Riskier Place?a Riskier Place?

P/C Insurance Industry in theAge of UncertaintyAge of Uncertainty

Insurance Council of Texas Annual SymposiumAustin TXAustin, TX

July 15, 2011Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ [email protected] ♦ www.iii.org

Presentation OutlineReview of Recent Events

What in the World is Going On?Summary of P/C Financial PerformanceyCatastrophe Loss Developments & Trends

GlobalUS

Will the Market Turn? Four Necessary Criteria:Underwriting Loss TrendsCapital/CapacityReinsurance MarketsPricing Discipline

Texas Markets: Performance OverviewProfitability and Growth

Other Contributing Factors to the Underwriting CycleInvestment Environment

2

Tort/Casualty EnvironmentInflationEconomic Growth

What in the World Is Going On?

Is the World Becoming a Riskier Place?Riskier Place?

What Are the Implications for

3

Insurance and Risk Management?

Uncertainty, Risk and Fear AboundJapan, New Zealand, Haiti, Chile EarthquakesNuclear FearsRecord Tornado, Flooding in the US, TX Wildfires, g ,Cyber AttacksResurgent Terrorism Risk (e.g., Bin Laden Killing)Political Upheaval in the Middle EastPolitical Upheaval in the Middle EastEchoes of the Financial CrisisHousing CrisisPersistently High UnemploymentPersistently High UnemploymentUS Debt and Budget CrisisSovereign Debt & Currency CrisesInflation/DeflationInflation/DeflationRunaway Energy & Commodity PricesEra of Fiscal AusterityReshuffling the Global Economic Deck

Are “Black Swans” everywhere or

4

Reshuffling the Global Economic DeckChina Becomes #2 Economy in the WorldManmade Disasters (e.g., Deepwater Horizon)

everywhere or does it just seem

that way?

P/C Insurance Industry Financial Overview

Profit Recovery Will Be Set B k b Hi h CAT LBack by High CATs, Low

Interest Rates, Diminishing

5

Reserve Releases

P/C Net Income After Taxes1991–2011:Q1 ($ Millions)

,496

65,7

77

$70 000

$80,000 2005 ROE*= 9.6%2006 ROE = 12.7%

P-C Industry 2011:Q1 profits were down 12.2% to $7.8B vs. $8.9B in 2010:Q1, as underwriting results

9

$62,

0

$6

44,1

55

501

$50 000

$60,000

$70,000 2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.9%2010 ROAS = 6.5%2011 Q1 ROAS 5 6%

Q , gdeteriorated

8 316 ,598

24,4

04 $36

,81

$30,

773

1,86

5

$30,

029

$34,

670

$28,

672$

4

,559

$38,

5

$30,000

$40,000

$50,000 2011:Q1 ROAS = 5.6%

$14,

178

$5,8

40

$19,

3

$10,

870 $20 $2 $21

3,04

6

3,04

3

$7,8

07

$20

$10,000

$20,000

,

$

$3 $3

-$6,970-$10,000

$0

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

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.5% ROAS for 2011:Q1, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE

15.9%110 18%

A combined ratio of about 100 generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

97.5100.6 100.1 100.7 99.3

100.8102.2101.0

9 6%

5 9%14.3%

12.7%

100

105

12%

15%

92.6 6.5%7.5%7.4%

9.6%

8.9%90

95

6%

9%

4.4%

80

85

1978 1979 2003 2005 2006 2008* 2009* 2010* 2011*0%

3%

1978 1979 2003 2005 2006 2008* 2009* 2010* 2011*

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s Depressed

* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers

Source: Insurance Information Institute from A.M. Best and ISO data.

Investment Environment to Generate Risk Appropriate ROEs

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011*

25%1977:19.0% 1987:17.3%

History suggests next ROE peak will be in 2016-2017

ROE

15%

20% 1997:11.6%2007:12.3%

2011:6 1%*

10%

15%10 Years

6.1%*

5%

-5%

0%

1984: 1.8% 1992: 4.5% 2001: -1.2%1975: 2.4%

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*

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

Profitability and Growth in T P/C I M k tTexas P/C Insurance Markets

Analysis by Line and Nearby y y yState Comparisons

9

RNW All Lines: TX vs. U.S., 2000-2009

20%

25%

(Percent)

10%

15%

20%

0%

5%

P/C Insurer profitability in TX is highly variable and

-15%

-10%

-5%g y

below that of the US overall over the past decade

US: 7.0%

-20%

-15%

00 01 02 03 04 05 06 07 08 09

US All Lines TX All Lines

TX: 3.7%

10Sources: NAIC.

RNW PP Auto: TX vs. U.S., 2000-2009

25%Pvt. Passenger Auto

profitability in TX is has been somewhat below the

15%

20%been somewhat below the

US in recent years

5%

10%

-5%

0%Average 2000-2009

US: 7.2%TX: 6.1%

-10%00 01 02 03 04 05 06 07 08 09

US PP Auto TX PP Auto

11Sources: NAIC.

RNW Comm. Auto: TX vs. U.S.,2000-2009

20%

(Percent)Commercial Auto

profitability in TX is ll b l th US

10%

15%generally below the US

average

5%

Average 2000 2009

-5%

0% Average 2000-2009US: 8.5%TX: 5.6%

-10%00 01 02 03 04 05 06 07 08 09

US Comm Auto TX Comm Auto

12Sources: NAIC.

RNW Comm. Multi-Peril: TX vs. U.S.,2000-2009

30%

(Percent)Hurricane Ike put a big

dent in CMP profitability in 2008

0%

10%

20%in 2008

-20%

-10%

0%

Average 2000-2009

-40%

-30%

-20% Average 2000-2009US: 8.0%TX: 0.4%

-50%00 01 02 03 04 05 06 07 08 09

US Comm M-P TX Comm M-P

13Sources: NAIC.

RNW Homeowners: TX vs. U.S.,2000-2009

50%

(Percent)Homeowners Profitability: Mold,

Hurricanes, Hail & Tornadoes(N d I S M ?)

30%

40%

50% (Need I Say More?)

0%

10%

20%

-30%

-20%

-10%

Average 2000-2009US: 4.7%

-60%

-50%

-40%

00 01 02 03 04 05 06 07 08 09

TX: -2.3%

14Sources: NAIC.

00 01 02 03 04 05 06 07 08 09

US HO TX HO

RNW Workers Comp: TX vs. U.S.,2000-2009

20%

(Percent)Workers comp

profitability in TX has ll

15%

generally outperformed the US

5%

10%

Average 2000 2009

0%

Average 2000-2009US: 6.4%TX: 9.2%

-5%00 01 02 03 04 05 06 07 08 09

US WComp TX WComp

15Sources: NAIC.

All Lines: 10-Year Average RNW TX & Nearby States

2000-2009

7.0%

10.5% New Mexico

U.S.Texas All Lines profitability

is below the US and regional average

6.0%

6.9% Arkansas

Oklahoma

regional average

-9.3%

13 0%

3.7%Texas

Mississippi-13.0%

-15% -10% -5% 0% 5% 10% 15%

Louisiana

Source: NAIC, Insurance Information Institute

PP Auto: 10-Year Average RNW TX & Nearby States

2000-2009

7.2%

11.1% New Mexico

U.S.

7.6%

6.8% Arkansas

Oklahoma

4.7%

0 8%

6.1%Texas

Mississippi

Texas PP Auto profitability is below the US and regional

average0.8%

0% 2% 4% 6% 8% 10% 12%

Louisiana


Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2008 (1)

RankMost

expensive statesAverage

expenditure RankLeast


expenditure1 D.C. $1,126 1 North Dakota $5032 Louisiana 1,105 2 Iowa 5193 New Jersey 1,081 3 South Dakota 5204 Florida 1,055 4 Nebraska 5475 New York 1,044 5 Idaho 5626 Delaware 1,007 6 Kansas 5767 Rhode Island 986 7 Wisconsin 5818 Nevada 970 8 North Carolina 5959 Connecticut 950 9 Maine 60010 Maryland 922 10 Indiana 612

Texas ranked 15th in 2008, with an average expenditure for auto insurance of $854.

18

(1) Based on average automobile insurance expenditures.

Source: © 2010 National Association of Insurance Commissioners.

Comm. Auto: 10-Year Average RNW TX & Nearby States

2000-2009

8.5%

11.1% New Mexico

U.S.

7.2%

6.1%

5 6%

Arkansas

Oklahoma

3.1%

-3.8%

5.6%Texas

Mississippi

Texas Commercial Auto profitability is below the US and regional average

-5% 0% 5% 10% 15%

Louisiana


Comm. M-P: 10-Year Average RNW TX & Nearby States

2000-2009

8.0%

13.3% New Mexico

U.S.

Texas Commercial Multi-Peril profitability

is below the US and i l

11.0%

6.4% Arkansas

Oklahoma

regional average

-10.0%

20 2%

0.4%Texas

Mississippi-20.2%

-30% -20% -10% 0% 10% 20%

Louisiana


Homeowners: 10-Year Average RNW TX & Nearby States

2000-2009

4.7%

12.0% New Mexico

U.S.

-1.6%

-6.9% Arkansas

Oklahoma

-29.0%

32 4%

-2.3%Texas

Mississippi

Texas Homeowners profitability is below the US and regional

average-32.4%

-40% -30% -20% -10% 0% 10% 20%

Louisiana


Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2008 (1)

M t A L t A

Texas ranked as the most expensive state for homeowners insurance in 2008, with an average expenditure of $1,460.

RankMost


expenditure RankLeast


expenditure1 Texas (3) $1,460 1 Idaho $3872 Florida (4) 1,390 2 Utah 4323 Louisiana 1 155 3 Oregon 4393 Louisiana 1,155 3 Oregon 4394 Oklahoma 1,048 4 Washington 4715 Massachusetts 1,026 5 Wisconsin 5036 New York 983 6 Delaware 5357 C ti t 980 7 Ohi 5657 Connecticut 980 7 Ohio 5658 Mississippi 980 8 Maine 5729 D.C. 926 9 Pennsylvania 58610 Kansas 916 10 Kentucky 601

(1) States with the same premium receive the same rank.(2) 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.(3) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms.(4) Florida data excludes policies written by Citizen's Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly

comparable to other states.

22

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data.

Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

Workers Comp: 10-Year Average RNW TX & Nearby States

2000-2010

6.4%

8.7% New Mexico

U.S.

3.7%

13.2% Arkansas

OklahomaTexas Workers

Comp profitability is

9.5%

9 9%

9.2%Texas

Mississippi

above the US average but similar

to the regional average

9.9%

0% 5% 10% 15%

Louisiana


All Lines DWP Growth: TX vs. U.S., 2001-2010

0.5%25%

(Percent)2.

0% 14.3

%

%

15.7

%

20

15%

20%

1

9.8%

7.4%

2% .4%

%

7.9%

%

6.2%

3.7% 9% %5%

10%

2.2 3

0.5 %

%

0.0%0.3% 1.

4 % 3 2.

6%

0.7 %

0%

5%

-2.1

%

-3.3

%-1

.6

-10%

-5%

01 02 03 04 05 06 07 08 09 10

24Source: SNL Financial.

01 02 03 04 05 06 07 08 09 10US DWP: All Lines TX DWP: All Lines

Comm. Lines DWP Growth: TX vs. U.S., 2001-2010

35%

(Percent)% 9.

0%

9.2%

27.2

%

25%

30%

35%

15.3

% 19

11.4

%

5% % 4%

19

9.2%

%

10.4

%

%10%

15%

20%

4.5

3.3% 5.

4

0.2%

2% %

0.1% 2.

3 % 4.1%

0.0%

9%-5%

0%

5%

-1.2

-7.3

% -2.5

%

-7.4

%

-0. 9

-15%

-10%

-5%

01 02 03 04 05 06 07 08 09 10


01 02 03 04 05 06 07 08 09 10US DWP: Comm. Lines TX DWP: Comm. Lines

Personal Lines DWP Growth: TX vs. U.S., 2001-2010

6.8%20%

(Percent)

11.1

%

%11.

3%

115%

8.2% 9.

2 %

5.4%

% % %

7.2%

% %

5.4%

4.3%

%5%

10%

2.3%

2.3%

1.2%

-0.1

%

1.1% 2

.5%

1.3%

0.5%

2.4 % 3.0 4

2.2%

0%

5%

01 02 03 04 05 06 07 08 09 10

-5%

01 02 03 04 05 06 07 08 09 10

US DWP: Personal Lines TX DWP: Personal Lines


Private Passenger Auto DWP Growth: TX vs. U.S., 2001-2010

%

20%

(Percent).2

% 10.2

%

9%

11.3

% 13.6

%

6% %10%

15%

8. 7.9

3.6%

.6%

.5%

0% 1% 1.5%

7.6

1.4% 1.8%

2.0%

6.3 %

3.5%

1.4%

5%

0%

0. 0. 0.0

-0.1 1

0.4%

0.4%-5%

0%01 02 03 04 05 06 07 08 09 10

-0-0

-10%US DWP: Personal Lines TX DWP: Personal Lines


Homeowner’s MP DWP Growth: TX vs. U.S., 2001-2010

5.7%

30%

(Percent)

%2

20%

25%

%

14.4

%

13.5

%

11.1

%

% %

11.5

%15%

8.3

7.3%

7.4%

4.2%

5%

3.9% 4.

9%6.3%

9% 2.6

%

3.5% 5

.3%

3.5%

6.0%

3.6%5%

10%

0.50.9

0%01 02 03 04 05 06 07 08 09 10

US DWP: Personal Lines TX DWP: Personal Lines


Catastrophe Loss pDevelopments and Trends

2011 and 2010 Are Rewriting C t t h L dCatastrophe Loss and

Insurance History

29

Global Catastrophe Loss Summary: First Half 2011

2011 Is Already (as of June 30) the Highest Loss Year on Record GloballyExtraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of lossand tornadoes are the primary causes of loss

$260 Billion in Economic Losses GloballyNew record for the first six months, exceeding the previous record of $220B in 2005

Economy is more resilient than most pundits presume

$55 Billion in Insured Losses GloballyMore than double the first half 2010 amount

Over 4 times the 10-year average

$27 Billion in Economic Losses in the US$Represents a 129% increase over the $11.8 billion amount through the first half of 2010

$17.3 Billion in Insured Losses in the US Arising from 100 CAT EventsRepresents a 162% increase over the $6.6 billion amount through the first half of 2010

30

Insured Loss Estimates for Selected Major Catastrophes in 2011

Japan Earthquake

April Tornadoes

May (Joplin)

Tornadoes

Eqecat $22 to $39 billion

$5 billion to $7 billion

$1 billion to $3 billionbillion $7 billion $3 billion

RMS $21 to 34 billion

$3.5 to $6 billion

$2 to $6 billion

$20 billi t $5 billi t $2 t $6AIR $20 billion to $30 billion

$5 billion to $7 billion

$2 to $6 billion

31

US Second Quarter Insured Catastrophe Losses, 2000–2011$ Billions

2011:Q2 CAT losses totaled

$ $15.09

$12

$14

$16Q2 CAT losses from 2000-2010 average $4.0 billion. 2011:Q2

CAT losses were nearly 4 times that amount at $15.09 billion

$15.09 billion and are the highest on

record

$7.11$6.38$6.24

$8

$10

that amount at $15.09 billion

$5.04

$2.30

$4.47

$0.93$2.33

$5.05

$2.79$1.46$2

$4

$6

$0.93

$02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Record Q2 (and First Half) CAT Losses Will Adversely Impact Insurer

32Sources: ISO/PCS; Insurance Information Institute.

Record Q2 (and First Half) CAT Losses Will Adversely Impact Insurer Results in 2011

Top 15 Most Costly World Insurance Losses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)

$72.3

$60$70$80

Three of the top 15 most expensive catastrophes in

world history have occurred in

$20 5 $20 8 $23.1 $24.9$35.0

$30$40$50$60 y

the past 18 months

$11.3 $14.0 $14.9$20.5 $20.8 $

$10.0$9.3$9.0$8.0$8.0$7.8

$0$10$20

Winter Chile Hugo TyphoonCharley New Rita Wilma Ivan Ike Northridge WTC Andrew Japan KatrinaeStormDaria(1991)

C eQuake(2010)

ugo(1989)

yp ooMirielle(1991)

C a ey(2004)

eZealandQuake(2011)

a(2005)

a(2005)

a(2004)

e(2008)

o dge(1994)

CTerrorAttack(2001)

d e(1992)

JapaQuake,

Tsunami(2011)*

a a(2005)

33

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

Top 16 Most Costly World Insurance Losses, 1970-2011*


T k i l h

3 of the top 15 most expensive

catastrophes in world

$72.3

$60$70$80

Taken as a single event, the Spring 2011 tornado season would likely become the 9th

history have occurred in the past 18 months

$20 5$20 8 $23 1$24.9$35.0

$30$40

$50$60 costliest event in global

insurance history

$11.3$14.0 $14.0$14.9$20.5$20.8 $23.1

$10.0$9.3$9.0$8.0$8.0$7.8

$0$10$20$

Winter Chile Hugo Typhoon Charley New Rita Spring Wilma Ivan Ike Northridge WTC Andrew Japan KatrinaWinterStormDaria(1991)

ChileQuake(2010)

Hugo (1989)

TyphoonMirielle(1991)

Charley(2004)

NewZealandQuake(2011)

Rita (2005)

SpringTornadoes

(2011)

Wilma(2005)

Ivan (2004)

Ike (2008)

Northridge(1994)

WTCTerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

34

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

Worldwide Natural Disasters,1980 – 2011*

600Number of Events Already 355 events

through the first 6 months of 2011

400

500

months of 2011

300

100

200

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

Meteorological events Hydrological events Climatological eventsGeophysical events

*2011 figure is through June 30.Source: MR NatCatSERVICE 35

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami, volcanic eruption)

Worldwide Natural Disasters 1980–2011,Overall and Insured Losses*

300

First Half 2011Overall Losses: $265 Bill

250

Insured Losses: $60 Bill

S$b

n 150

200

US

100

50

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

36

Overall losses (in 2011 values) Insured losses (in 2011 values)

*2011 figure is through June 30.Source: MR NatCatSERVICE © 2011 Munich Re

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

JAPAN EARTHQUAKE/TSUNAMI &JAPAN EARTHQUAKE/TSUNAMI & NUCLEAR DISASTER

March 11 Quake/Tsunami Is Just the Most Recent of S l L Gl b l C t t h LSeveral Large Global Catastrophe Losses

37

Insured Japan Earthquake Loss Estimates*

(Insured Losses, $ Billions)

Eqecat $22 ‐ $39 bn

Economic lossesRMS $21 - $34 bn

Economic losses are likely to total in

the $200-$300 billion range,

meaning only aAIR Worldwide $20 ‐ $35 bn

meaning only a fraction of the loss

is insured

$ $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

Towers Watson $20 ‐ $45 bn

$‐ $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

38

*As of June 17, 2011. Towers Watson estimate includes $3.0 (low) to $4.9 billion (high) in life insurance losses. RMS estimate includes insured life/health losses of $3 to $8 billion.Sources: AIR Worldwide, Eqecat, RMS, Towers Perrin; Insurance Information Institute.

Recent Major Non-US Catastrophe Losses(Insured Losses, $US Billions)

$40 The March 2011 earthquake in Japan will $35.0

$25$30

$35$40 q p

become among the most expensive in world history in terms of insured losses (current

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

$10.0$8.0$5.0

$10$15$20

)

$2.0$0.5$0$5

Cyclone Yasi(Australia) Feb

2011

Australia Floods(Dec - Feb 2011)

New ZealandQuake (Sep 2010)

Chile Earthquake(Feb 2010)

New ZealandQuake (Feb 2011)

Japan Earthquake(Mar 2011)

2011

Insured Losses from Recent Major Catastrophe Events Exceed $60 Billion, an Estimated $53 Billion of that from Earthquakes

39Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.

Nonlife (P/C) Insurance Market Impacts of Japan Earthquake

No Direct Impact for US Domestic Primary InsurersBUT: $2 - $5 Billion in Assumed Loss from Foreign Catastrophes Will Wind Up on the Books of US Insurers, Most with No Direct Exposure to Japan/Australia/NZ

US reinsurersUS reinsurersRetrocessional marketBlanket property insurance covers

Primary Insurance: Domestic Japanese Insurers Take Big LossesFew US/Foreign Insurers Had Direct Exposure to Japanese P/C Market

Low single-digit market share for a small number of companiesSignificant Absorption of Loss by Japanese Government

Residential earthquake damageq gNuclear-related property and liability damage

Significant Impacts for Global ReinsurersProperty-Catastrophe covers on Commercial LinesBusiness Interruption/Contingent Business Interruption

Supply Chain Disruption Concern (Now Waning)Currently an Earnings Event for Global Reinsurers

Not a capital event: Global reinsurance markets entered 2011 with record capitalCost of Property/Cat Reinsurance Rising in Japan New Zealand Australia

40

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

Impact on Cost of US Property-Cat Reinsurance is Possible/LikelyMarket remains well capitalized and competitive

SPRING 2011 TORNADO OUTBREAK

2011 Will Be Among the Most Deadly and g yExpensive for Tornadoes In History

41

Insured Loss Estimates from April 2011 Tornadoes*


Eqecat $5 ‐ 7 bn The April tornadoes killed

RMS $3.5 - $6.0 bn

more that 300 people and

caused as much as $7 billion in

AIRW ld id $ $

as $7 billion in insured losses

$ $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

AIR Worldwide $5 ‐ $7 bn

$‐ $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

42

*As of June 17, 2011. Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.

Insured Loss Estimates from May 2011 (Joplin) Tornadoes*


Eqecat $1 ‐ $3 bn The May tornadoes killed

RMS $2 - $6 bn

more that 125 people and

caused as much as $6 billion in

AIRW ld id

as $6 billion in insured losses

$ $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

AIR Worldwide $2 ‐ $6 bn

$‐ $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

43

*As of June 17, 2011. Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.

Summary of Recent Tornado Activity

There Have Been 1,585 Tornadoes Through June 30 in the US

537 People Have Been Killed

The April 27 Tornado Outbreak Killed at Least 342 PeopleNow the 2nd deadliest outbreak in US history (747 killed in march 1925 event)

States impacted: AR, TN, LA, MS, GA and especially AL

Insured Losses Estimated at $3.5B to $7B

Economic Losses Likely in the $7 Bill to $14 Bill RangeEconomic Losses Likely in the $7 Bill to $14 Bill Range

The May 22 Tornado in Joplin, MO, Killed at Least 130 PeopleLargest number of deaths from a single tornadoLargest number of deaths from a single tornado

Insured Losses Estimated at $1B to $6B

P/C Insurance Industry is Very Strong and Will Encounter No

44

y y gDifficulties in Paying these Claims

Number of Tornadoes and Related Deaths, 1990 – 2011*

6921,819

5

5371 800

2,000 600Number of Tornadoes

Number of Deaths

Tornadoes have already claimed more than 500 lives

33 32

1,29

7

173

2 1,23

4

173

48

1,42

4

1,34

5

1 1,21

6 1,37

6

1,26

4

03 98

1,6

156 1,28

2

1,58

5

1,400

1,600

1,800

does

400

500

Num

1,13

1,13 1,1

1,08

2 1

1,1

1,1

1,07

1 1

941

1,10

1,09 1,

1

800

1,000

1,200

ber o

f Tor

nad

300

mber of D

eaThere were already

200

400

600

Num

b

100

200

aths

y1,585 tornadoes in the US by June 30

0

200

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P0

Insurers Expect to Pay $2 Billion on 165 000 Claims Arising from the

45

*2011 is preliminary data through June 30.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.

Insurers Expect to Pay $2 Billion on 165,000 Claims Arising from the April 2011 Tornadoes in the Birmingham and Tuscaloosa Areas

Insurers Making a Difference in Impacted Communities

Destroyed home in Tuscaloosa. Insurers will pay some 165 000will pay some 165,000

claims totaling $2 billion in the Tuscaloosa/

Birmingham areas alone.

P t ti f h kPresentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm

Source: Insurance Information Institute 46

Recovery Fund

U.S. Tornado Count, 2005-2011*

There were 1,585 tornadoes i h US i 2010 li h l

Tornado in the US in 2010, slightly

above averageactivity was off its record pace

by mid-year

Deadly and costly April/ May spike

47Source: http://www.spc.noaa.gov/wcm/ *Through July 2.

Location of Tornadoes in the US, January 1—June 30, 2011

1 585 tornadoes1,585 tornadoes killed 537 people through June 30, including at least 340 on April 26340 on April 26 mostly in the

Tuscaloosa area, and 130 in Joplin

on May 22on May 22

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 48

Location of Large Hail Reports in the US, January 1—June 30, 2011

There were 7,176 “Large Hail”

reports through June 30, causing

extensive damage to homes,

businesses and vehicles


Location of Wind Damage Reports in the US, January 1—June 30, 2011

There were 11,283 “Wind Damage” reports through

June 30 causingJune 30, causing extensive damage

to homes and, businesses


Severe Weather Reports,January 1—June 30, 2011

There have been 20,044

severe weather reports through

June 30; ;including 1,585

tornadoes; 7,176 “Large Hail” reportsHail reports

and 11,283 high wind events

51Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

Number of Severe Weather Reports in US, by Type: January 1—June 30, 2011

Tornadoes, ,1,585 , 8%

Large HailLarge Hail, 7,176 , 36%

Wind DamageDamage,

11,283 , 56%Tornadoes accounted

for just 8% of all Severe Weather Reports through J 30 b tJune 30 but more than 500 deaths

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

US CATASTROPHE INSURED LOSS UPDATE

First Half 2011 CAT Losses Already Exceed All of 2010 and Could Become One of the Most

Expensive Years on Record

53

US Insured Catastrophe Losses

$100

.0$120$100 Billion CAT Year is

Coming Eventually($ Billions)

$61.

9

$

$60

$80

$100 Record Tornado Losses Caused

H1 CAT Losses to Surge

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89B

3 4 0.1

3

$26.

5

9 12.9 $

27.5

2 7

$27.

1

0.6

13.6

$17.

3

5 $22

.9

5 $16.

9

$20

$40

$60$8

.3

$7.4

$2.6 $1

0

$8.3

$4.6

$5.9 $1 $9.

$6.7 $10

$1 $

$7.5

$2.7

$4.7

$5. 5 $

$0

$20

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

First Half 2011 US CAT Losses Already Exceed Losses from All of 2010. Even Modest Hurricane Losses Will Make 2011 Among the

Most Expensive Ever for CATs

54

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

Natural Disaster Losses in the United States: First 6 Months 2011

As of July 6, 2011

Number of Events Fatalities

Estimated Overall Losses (US $m)

Estimated Insured Losses (US $m)

SevereThunderstorm 43 593 23,573 16,350

Winter Storm 8 15 1,900 1,425

Flood 8 15 2,100 in progress

Earthquake 2 1 105 in progress

Tropical Cyclone 0 0 0 0

Wildfire 37 7 125 50Wildfire 37 7 125 50

55Source: MR NatCatSERVICE

Top 12 (13?) Most Costly Disastersin U.S. History


$45.8

$40$45$50

Taken as a single event, the Spring 2011 tornado season

would likely become 5th costliest

$$17.5

$22.6 $23.1

$20$25$30$35$ y

event in US insurance history

$11.5 $12.8$14.0

$8.6$8.2$6.7$6.3$5.3$4.3

$0$5

$10$15$20

$0Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

SpringTornadoes*

(2011)

Northridge(1994)

Andrew(1992)

9/11 Attack(2001)

Katrina(2005)

56

*Losses will actually be broken down into several “events” as determined by PCS.Sources: PCS; Insurance Information Institute inflation adjustments.

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011:H1*

810

Avg. CAT Loss Component of theCombined Ratio

by Decade

Combined Ratio Points

8.8

5.9

4

8.1

6789

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31

0 0

3.0

1 .35

3.3

2.8 3

.62.

9

5.4

3.3

3.3

2.7

5.0

2.6 3

.35.

0

3.6

3456 1990s: 3.39

2000s: 3.52 2010s: 4.15*

0.4 1

.20.

4 0.8 1.

30.

3 0.4 0.

7 1.5

1.0

0.4

0.4 0.

71.

81.

10.

6 1.4 2

.01.

3 2.0

0.5

0.5 0.7 1.

2 2. 1 2.

1.0 1

.6 1.6

21.

6

2

0.9

0.1

1.1

1.1

0.8

0123

0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 E

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

E

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

57

*Insurance Information Institute estimates for 2010 and 2011:H1Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.

Increased Sharply in Recent Decades

Natural Disasters in the United States, 1980 – 2011*Number of Events (Annual Totals 1980 – 2010 and First Half 2011)u be o e ts ( ua ota s 980 0 0 a d st a 0 )

300

There were 98 natural

200

250

There were 98 natural disaster events in the first

half of 2011

Num

ber

150

200

N

50

10037

8

Geophysical ClimatologicalMeteorological (storm)

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

51

2

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

*Through June 30.Source: MR NatCatSERVICE 58

U.S. Thunderstorm Loss Trends, 1980 – 2011*

Thunderstorm losses in the first half of 2011 totaled $16.4 billion, a new

annual record through just 6 months

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss

Average thunderstorm losses are up more

producers of large scale loss. 2008-2011 are the most expensive

years on record.

losses are up more than 8 fold since the

early 1980s

59*Through June 30, 2011.Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals) vs. First Half 2011

Insured winter storm losses in 2011 totaled $1.4 billion

and are up 50% since 1980and are up 50% since 1980.

Source: Property Claims Service, MR NatCatSERVICE 60

U.S. Acreage Burned by Wildfires, 1980 – 2010 (Annual Totals) vs. First Half 2011

2011 could be a severe year for wildfire damage. Acresfor wildfire damage. Acres

burned through June 30 already exceed all of 2010.

Source: National Forest Service, MR NatCatSERVICE 61

Notable Wildfires in 2011

April – JuneApril – June

Texas: Over 3 million acres burned in west Texas from 12 major

Texas: Over 3 million acres burned in west Texas from 12 major seats of fire. Over 200 homes and businesses destroyed, $50 million

seats of fire. Over 200 homes and businesses destroyed, $50 million insured loss.

Arizona and New Mexico:

insured loss.

Arizona and New Mexico: “Wallow” fire largest in AZ history at 538,000 acres, Las Conchas fire near Los

“Wallow” fire largest in AZ history at 538,000 acres, Las Conchas fire near Los Alamos, 30 buildings destroyed.Alamos, 30 buildings destroyed.

Source: NASA

62Source: Munich Re.

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H11

2.4%

Fires (4), $9.0

Geological Events, $18.5

Wind/Hail/Flood (3), $12.7

Other (5), $0.6

0.2%3.4%4.9%

6.6%

Terrorism, $24.9

8.0%42.7%

Hurricanes & Tropical Storms, $160.5

Winter Storms, $30.0

Tornado share of CAT l i

31.8%

T d (2) $119 5

Wind losses are by far cause the most catastrophe losses,

if h i /TS

CAT losses is rising

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2 E l d

Tornadoes (2), $119.5 even if hurricanes/TS are excluded.

63

2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Number of Federal Disaster Declarations, 1953-2011*

75 75

81

80

90The number of federal

disaster declarations is on track to set a new record in

There have been 1,998 federal disaster

declarations since 1953 The average

8

7

6550 9

5669

8 52

637

598

60

702011, with 48 declarations

through July 1.1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995

25 25

29

48 46 4638

30

2542

3 4

3427 2

83

3138

4532

3632

44

545 45

49 48 48

43

30

40

50 recorded since 1995.

1317 1

816 16

7 712 12

22 202 2

11 1119 17 17

222 23

152

21 23

11

10

20

0

53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

The Number of Federal Disaster Declarations Is Rising

*Through July 1, 2011.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

g

Federal Disasters Declarations by State, 1953 – June 30, 2011: Highest 25 States

100Over the past

nearly half century Texas

8578

0

8090

100

s

century, Texas has led the US in Federal Disaster

Declarations

7063 63

56 55 54 52 52 51 50 49 7 6 6506070

clar

atio

ns

5 4 47 46 46 45 45 44 44 44 42 42 39 39

304050

sast

er D

e

102030

Di

65

0TX CA OK FL NY LA AL KY AR MO IL MS TN MN IA WV KS NE OH PA WA ND VA IN NC

Source: FEMA.

Federal Disasters Declarations by State, 1953 – June 30, 2011: Lowest 25 States

50

39 3836 5 5

40

50

s 3 35 3530 29

2725 25 25 25 4 3 3

30

clar

atio

ns

2 2 2 2 2 23 2320 20

17 16 15 1513

20

sast

er D

e

19 8 8 810

Di

66

0SD ME GA AK WI VT NJ OR HI MA MI NH AZ ID NM MD MT NV CO CT SC DE DC RI UT WY

Source: FEMA.

The BIG Question:When Will the Market Turn?

Insurance Cycle Dynamics

67

Criteria Necessary for a “Market Turn”:All Four Criteria Must Be Met

Criteria Status Comments

Sustained •Apart from Q2:2011, overall p/c underwriting losses remain d tPeriod of

Large Underwriting

Losses Not Yet Happened

modest•Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market)•Prior-year reserve releases continue reduce u/w losses, b t ROEHappened boost ROEs

Material Decline in Surplus/ Surplus is

•Surplus hit a record $565B as of 3/31/11•Analysts est. excess surplus of $75-$100B•Some excess capacity may still remain in reinsurance

k tSurplus/ Capacity

Surplus is At/Near

Record High

markets•Weak growth in demand for insurance is insufficient to absorb much excess capacity

Tight R iReinsurance

MarketSomewhat in

Place•Higher prices in Asia/Pacific•Modestly improved pricing for US risks

Renewed Underwriting

•Commercial lines pricing trends remain negative•Competition remains intense as many seek to maintain

68

Underwriting & Pricing Discipline

Not Broadly Evident

•Competition remains intense as many seek to maintain market share•Terms & conditions—no broad tightening

Sources: Barclays Capital; Insurance Information Institute.

Do the Property Catastrophe Events of 2011 Impact Casualty Markets?

Unlikely that Record 2011 Property CAT Loss Will Impact Casualty Markets in Any Material Way Global P/C & Reinsurance Industries Entered 2011 w/ Record CapitalGlobal P/C & Reinsurance Industries Entered 2011 w/ Record Capital

Events so far in 2011 are earnings events, rather than capital events

Natural Catastrophe and Casualty Risks Are Largely UncorrelatedRisks are different

Geographically, mostly distinct primary carriers: Japan-Australia-NZ-US

Casualty markets generally don’t influence property markets

Property and Casualty Risks Are Largely SiloedRecord Property Losses in 2004/2005 Did Not Impact Casualty MktsRecord Property Losses in 2004/2005 Did Not Impact Casualty Mkts.Casualty Markets Have Their Own Issues

Tort environment

69

Inflation

Public policy

1 UNDERWRITING1. UNDERWRITING

Have Underwriting Losses gBeen Large Enough for Long Enough to Turn the Market?

70

Enough to Turn the Market?

P/C Insurance Industry Combined Ratio, 2001–2011:H1*

As Recently as 2001, Insurers Paid Out

Nearly $1 16 for Every

Relatively Low CAT L

Heavy Use of Reinsurance Lowered Net

Relatively Low CAT L

Higher CAT

Losses, Shrinking Nearly $1.16 for Every

$1 in Earned Premiums

Losses, Reserve Releases

Lowered Net Losses Losses, Reserve

Releases

A CAT

gReserve

Releases, Toll of Soft

Market

115.8120

Best Combined

Ratio Since 1949 (87 6)

Cyclical Deterioration

Avg. CAT Losses,

More Reserve Releases

99 3100.8

107.5

101.0100.8100.1

107.51101949 (87.6)

95.7

99.3

92.6

98.4

90

100

71

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.1 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).

902001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Underwriting Gain (Loss)1975–2011*

$35 Cumulative underwriting deficit f 1975 th h

($ Billions)Underwriting

losses in 2011 will be

much larger: $17 9B

$5

$15

$25 from 1975 through 2009 is $445B

$17.9B based on

annualized Q1 data

$25

-$15

-$5

-$45

-$35

-$25

The industry recorded a $10.4B underwriting loss in 2010 compared

to $3 0B in 2009

Large Underwriting Losses Are NOT Sustainable

-$5575 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*

to $3.0B in 2009

* Includes mortgage and financial guaranty insurers in all years. 2011 figure is annualized based on actual Q1 underwriting losses of $4.463 billion.Sources: A.M. Best, ISO; Insurance Information Institute.

in Current Investment Environment

Number of Years with Underwriting Profits by Decade, 1920s–2010s

10

12Number of Years with Underwriting Profits

8

10

76

8

10

3

54

6

4

6

0 0 00

2

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**

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

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

73

* 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.**Data for the 2010s includes 2010 and 2011.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Recorded in the 25 Years from 1979 Through 2003

P/C Reserve Development, 1992–2011E

23.2$25$30

$B)

6

8 Impac

Prior Yr. ReserveDevelopment ($B)

Prior year reserve releases totaled $8.8

billion in the first half of 2010 up from

11.7 13.7 9.97.3

$

$10

$15

$20

e R

elea

se ($

2

4

6 ct on Com

b

Impact onCombined Ratio

half of 2010, up from $7.1 billion in the first half of 2009

2.3

-2.1 -2.6-6 6

-4.1

1

6 7 -5$10-$5

$0

$5

rYr.

Res

erve

-2

0

ined Ratio (

-8.3 -6.6 -9.9 -9.8-6.7

-9.5-14.6-16 -15-$20

-$15

-$10

2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 E E

Prio

r

-6

-4

(Points)

92 9 94 9 9 9 9 9 0 0 02 0 0 4 0 0 0 0 0

10E

11E

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

74

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

2 SURPLUS/CAPITAL/CAPACITY2. SURPLUS/CAPITAL/CAPACITY

Have Large Global Losses Reduced C it i th I d t S ttiCapacity in the Industry, Setting

the Stage for a Market Turn?

75

US Policyholder Surplus:1975–2011*

$600

($ Billions)

Surplus as of 3/31/11 was a record $564.7B, up from $437 1B at the crisis trough at 3/31/09 Prior

$400$450$500$550 from $437.1B at the crisis trough at 3/31/09. Prior peak was $521.8 as of 9/30/07. Surplus as of 3/31/11

was 8.2% above 2007 peak; Crisis trough was as of 3/31/09 16.2% below 2007 peak.

$250$300$350$400

“Surplus” is a measure of

$50$100$150$200 underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

$0$50

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*

organizations

The Premium-to-Surplus Ratio Stood at $0.77:$1 as of

* As of 3/31/11.Source: A.M. Best, ISO, Insurance Information Institute.

The Premium to Surplus Ratio Stood at $0.77:$1 as of3/31/11, A Near Record Low (at Least in Recent History)**

Policyholder Surplus, 2006:Q4–2011:Q1

($ Billions)

$564 7$580

2007:Q3Previous Surplus Peak Surplus set a new

record in 2011:Q1*

$512.8$521.8

$511.5

$540.7$530.5

$544.8$556.9

$564.7

$505 0$515.6$517.9$520

$540

$560

$487.1$496.6

$478.5

$455.6$463.0

$490.8$505.0

$460

$480

$500

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

NPW th t t l i$437.1

$420

$440

$460

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1

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

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%)09:Q2: -$58.8B (-11.2%)

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

*Includes $22.5B of paid-in capital from a holding company parent for one

’

77Sources: ISO, A.M .Best.

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

Q $ ( )10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)11:Q4: +$42.9B (+8.2%)

insurer’s investment in a non-insurance business in early 2010.

Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1

Excess/(Deficit) Capital (Policyholder Surplus)

$81.921.6%100 25%

Annual Change in Policyholder Surplus

2000-2002: Tech bubble bursts,

/

2006/07: Low CAT losses, strong underwriting results since 1940s

i it l

2009-10: End of financial crisis,

rising asset prices. modest

u/w losses h it l t

$22.9$41.714.4%13.4%50

10%

15%

20%9/11, high

underwriting losses erode capital base

increase capital push capital to record levels

($10.6)

$

($10.8)($32.7)

($49.2)

8.9%12.3%6.2%

-5.1%

8.2%-50

0

0%

5%

10%

2008: Financial ($65.4)

($124.6)($103.0)

($76.5)

-12.0%-8.8%

-1.5%

-150

-100

-15%

-10%

-5%2005: Katrina, Rita, Wilma

produce record CAT losses

crisis causes sharp drop in

capital

1502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

15%

Capital Excess (Deficit) Annual Change in CapitalRecord Policyholder Surplus (Capital) Has Resulted Significant Excess Capital in the P/C Insurance Sector As of Year End 2010 Deteriorating Underwriting Losses HigherP/C Insurance Sector As of Year End 2010. Deteriorating Underwriting Losses, Higher CAT Activity, More Modest Market Returns Will Likely Shrink Excess Capital in 2011.

Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.

Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written

M&A Activity Globally Among P/C Insurers Remains Subdued: Little Capacity Leaving

5.1 .2 .4 3.9

6.5

2010

Property-Casualty Life-Annuity Health/Managed Care Distribution Services

.4

$45

8

$1

8

$2

4

$13

.0$1

62010$2

4.

$5.8

$0.8

$9.4

3

$15.2009

$5.5

$2.3

$9.8

$7.6

$30.

3

2008

$51.

8

$13.

8

$15.

3

$6.9

$50.

6

2007

79

$0 $35 $70 $105 $140

Sources: Conning Research; Insurance Information Institute.

$ Billions

Paid-in Capital, 2005–2010($ Billions)

$30Paid-in capital for insurance

ti b $27 4B

$27.4

$22.5

$20

$25 operations rose by $27.4B in 2010, the largest on record dating back to 1959

$10

$15

$14.4

$3.8 $3.2

$12.3$4.9$6.6

$0

$5

$02005 2006 2007 2008 2009 2010:Q3

In 2010 One Insurer’s Paid-in Capital Rose by $22.5B

80Source: ISO; Insurance Information Institute.

p yas Part of an Investment in a Non-insurance Business

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

18%

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Over

(Percent)

13.8%

16.2%

15%

18% pthe Past 20+ Years

9.6%

6.9%

10.9%

6 2%

9%

12%

3.3%

6.2%

3%

6%

0%6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

81

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

Hugo Andrew Earthquake Hurricanes Katrina 3/31/09**

Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*

30%

(Percent) Surplus growth still exceeds premium growth, suggesting an ongoing build-up of capacity in

l 2011

15%

20%

25% early 2011

0%

5%

10%

15%

-10%

-5%

0%

-15%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

NWP % change Surplus % change

Sharp Decline in Capacity is a Necessary but

82

* 2011 NWP and Surplus figures are % changes as of Q1:11 vs. Q1:10. Sources: A.M. Best, ISO, Insurance Information Institute

Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market

Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2011*

2.7

2.52.52.5

3.0 The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.76:1 in 2010. It has decreased as PHS grows

Record High P-S Ratio was 2.7:1

in 1974

2.1

1.9

22.

3

1.8

1.7

1.7

1.9

1.9

1.9

1.9

1.7

6 6

2.0

2

2.1

2.0

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

1 1 11.

61.

61.

41.

41.

31.

31.

11.

10.

9 7

1.13

0.94

.8684

1.29

1.17

1.07

0.99

840.91 60.9

582

1.6 1

.8

1 0

1.5

0

0.7700.0.8

0.80

0.760.8

0.5

1.0

Record Low P-S Ratio was 0.76:1 as of 12/31/10, rising

slightly to 0 77:1 as of 3/31/110.0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 0 02 04 06 08 10

The Premium-to-Surplus Ratio in 2011:Q1 Implies that P/C Insurers Held $1 in Surplus Against Each $0 77 Written in Premiums In 1974 Each $1

slightly to 0.77:1 as of 3/31/11

83

$1 in Surplus Against Each $0.77 Written in Premiums. In 1974, Each $1 of Surplus Backed $2.70 in Premium.

*2011 data are as of 3/31/11.Sources: Insurance Information Institute calculations from A.M. Best data.

3. REINSURANCE MARKET CONDITIONS

H R d Gl b lHas Record Global Catastrophes Activity

Erased Enough Capacity to Turn Markets?

84

to Turn Markets?

Significant Market Losses, 1985-2011*

$90

$100

$70

$80

$90

Reinsurers’ share of major market losses was

exceptionally high in 2010 and early 2011

REINSURANCE PRICING TRENDS

•Property/CAT reinsurance prices

$40

$50

$60

Bill

ion

s

ye su a ce p cesare up substantially in Asia/Pacific markets•US pricing is up 10-15%, but ex-Florida closer to flat

$10

$20

$30closer to flat

$0

$

1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1998 1999 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011

Worldwide Direct Insured Losses Reinsured LossesWorldwide Direct Insured Losses Reinsured LossesSource: Holborn; RAA.* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.

Significant Market Losses by Event, 1985-2011*

Reinsurers are bearing a very high

Losses are putting pressure on property cat reinsurance prices in affected

regions. The impact for US property catastrophe pricing is uncertainbearing a very high

share of recent catastrophe losses

catastrophe pricing is uncertain.

Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further.

Outlook for the 2011 Atlantic Hurricane Season

If Expected Above AverageIf Expected Above Average Activity Produces Costly L df ll R iLandfalls, Reinsurance Markets Could Harden

87

Significantly

Outlook for 2011 Hurricane Season: 75% More Active Than Average

Average* 2005(Katrina Year)

2011F( )

Named Storms 9.6 28 16Named Storm Days 49.1 115.5 80Hurricanes 5.9 14 9Hurricane Days 24.5 47.5 35Intense Hurricanes 2.3 7 5

Intense Hurricane Days 5.0 7 10

Accumulated Cyclone Energy 96.1 NA 160

Net Tropical Cyclone Activity 100% 275% 175%p y y

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2011

Average* 2011FAverage 2011F

Entire US Coast 52% 72%

US East Coast Including Florida Peninsula

31% 48%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 47%

ALSO…Above-Average Major HurricaneLandfall Risk in Caribbean for 2011 (61% vs. 42%)

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.

US Property Residual Markets Remain Under StrainRemain Under Strain

Most States Fail to Address Their Vulnerabilities toTheir Vulnerabilities to

Catastrophic Coastal Loss

90

U.S. Residual Market Exposure to Loss($ Billions)

$757.9$771.9 $703 0$800

$900($ Billions)

Katrina, Rita and Wil $

$656.7 $696.4$703.0

$600

$700

$

4 Florida Hurricanes

Wilma

$281.8

$430.5$372.3

$292.0$244 2

$419.5

$300

$400

$500Hurricane Andrew

$54.7

$150.0

$244.2$221.3

$100

$200

$

$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

In the 21-year period between 1990 and 2010, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54 7

91Source: PIPSO; Insurance Information Institute (I.I.I.); http://www.iii.org/pr/last-resort-2010.

residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7 billion in 1990 to $757.9 billion in 2010.

U.S. Residual Market: Total Policies In-Force (1990-2010) (000)

2,841.42 621 3

2,780.62,840.43,000

(000)

4 Florida

Katrina, Rita and Wilma

1 785 0 1 741 7

2,479.42,621.3

2,209.32,203.92,000

2,500Hurricanes

931 6

1,785.0

1,458.1

1,196.5

1,741.7

1,319.7

1,642.31,500

,Hurricane Andrew

931.6

500

1,000

01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

In the 21-year period between 1990 and 2010 the total number of policies

Source: PIPSO; Insurance Information Institute; http://www.iii.org/pr/last-resort-2010.

In the 21 year period between 1990 and 2010, the total number of policies in-force in the residual market (FAIR & Beach/Windstorm) Plans has more

than tripled.

92

Texas Windstorm Insurance Association (TWIA): Exposure to Loss (Building & Contents Only) ($ Billions)

$80

TWIA’s exposure to loss for building & contents has surged by more than 400 percent in the last 11 years from $12 1

$67.8$67.4$64.4$58.6$58.6$60

$70

percent in the last 11 years from $12.1 billion in 2000 to $67.8 billion in 2011.

$38.3

$30

$40

$50

$23.3$20.8$18.8$16.0$13.2$12.1$10

$20

$30

$02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 May

31-2011

Source: TWIA at 05/31/11, Texas Department of Insurance, Southwestern Insurance Information Services (SIIS)

2011

Texas Windstorm Insurance Association (TWIA) Total Exposure to Loss (Millions of Dollars)

By May 31, 2011, TWIA’s total exposure

$67,765.8

$60 000

$70,000

$80,000y y

had surged to $74.4 billion.

$40,000

$50,000

$60,000

$20,000

$30,000

$6,613.3

$0

$10,000

Building & Contents ALE/Business Income

Source: TWIA at 05/31/11, Texas Department of Insurance

u d g & Co te ts / us ess co e

Texas Windstorm Insurance Association (TWIA) New Financial Structure

N TWIA fi iNew TWIA financing structure made available up to $2.5 billion to fund

losses via three post-event bonding layers.event bonding layers.

The new structure eliminated the unlimited

assessment on TWIA member insurers and

d t ll f TWIA tdoes not call for TWIA to purchase reinsurance.

Source: Southwestern Insurance Information Institute (SIIS)

4. RENEWED PRICING4. RENEWED PRICING DISCIPLINE

Is There Evidence of a Broad and Sustained Shift in Pricing?

96

Soft Market Persisted in 2010 but Growth Returned: More in 2011?

25%

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

20%

25%Net Written Premiums Fell 0.7% in 2007 (First Decline

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

10%

15% 2011:Q1 growth was +3.5%; First Q1 growth since 2007

5%

10% since 2007

-5%

0%

NWP was up 0.9% in 2010

97

-5%

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*

*2011 figure is an estimate based on Q1 data. Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

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

5.1% 16

.8%

16.7

%% %

20%

The long-awaited uptick. In 2011:Q1 occurring in

personal lines predominating cos. (+3.8%)

10.2

%15

12.5

%10

.1%

9.7%

7.8%

7.2%

6% 5%

10.3

%10

.2% 13

.4.6

%10%

15% and commercial lines predominating cos. (+3.5%)

75.

62.

9%5.

5 6

2.1%

0.0% 0.5% 1.

3% 2.3%

1.3% 3

.5%

0%

5%-4

.6%

-4.1

%-5

.8%

-1.6

%

-1.6

%

-1.9

%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

-10%

-5%

Finally! Back to back quarters of net written premium growth

--10%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

98Sources: ISO, Insurance Information Institute.

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

Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2011)

Q04

Q04

Q04

Q04

Q05

Q05

Q05

Q05

Q06

Q06

Q06

Q06

Q07

Q07

Q07

Q07

Q08

Q08

Q08

Q08

Q09

Q09

Q09

Q09

Q10

Q10

Q10

Q10

Q11

(Percent)-0

.1%

-2%

0%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

Magnitude of Price Declines Shrank

During Crisis,

-3.2

%% -4

.6%

-2.7

%-3

.0%

3% .1%

4.9% % 6% 3% .2%

4%-2

.9%

-6%

-4%

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

-5.9

%-7

.0%

4% 7%-8

.2%

-

-5.

6%

-6.4

% -5 - 4-5

.8%

-5.6 -5.

-6.4

% -5.

-5.4

-10%

-8%

gPerformance, Higher

Cat Losses and Costlier Reinsurance

-9.

-9.7

-9.6

-11.

3%-1

1.8%

.3% -12.

0%5% 2.

9% -11

.0%

-14%

-12%

KRW Eff t

Q1 2011 decreases were the smallest

since 2006, perhaps signaling a market

firming

99

-13

-13. -1

2

-16%

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

KRW Effect firming

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q1Percentage Change (%)

Market has Been Soft for 7 years and Remains Soft as Capital Hits Record Levels;

Peak = 2001:Q4 +28.5% Capital Hits Record Levels;

But Is Softness Moderating?

Pricing TurnedPricing Turned Negative in Early

2004 and Has Been Negative

Ever Since KRW Effect: No Lasting Impact

Trough = 2007:Q3 -13.6%

100Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q1

1999:Q4 = 100

Pricing today is where is was in

Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for

larger riskslarger risks

101Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

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

10%Cyclical peaks in PP Auto tend to occur

approximately every 10

8%

pp y yyears (early 1990s, early

2000s and likely the early 2010s)

A pricing peak

4%

6% A pricing peak may have occurred in 2010

2% “Hard” markets tend to occur

during

May 2011 change

was 3.8%, down from

5.4% in

-2%

0%g

recessionary periods

Nov. 2010

102

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

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

Other Cycle-Influencing Factors

Could Other Factors Act as a Catalyst to Turn the

Market?103

Market?

INVESTMENTS:INVESTMENTS: THE NEW REALITY

Investment Performance is a Key Driver of ProfitabilityKey Driver of Profitability

Does It Influence U d iti C li lit ?

104

Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q11

$64.0$70

($ Billions)

$42.8$47.2

$52.3

$44.4 $45.3$48.9

$59.4$55.7

$39 2

$52.9$58.0

$51.9$56.9

$50

$60

$35.4 $36.0$31.7

$39.2

$20

$30

$40

Investment gains in$13.5

$0

$10

$20 Investment gains in 2010 were the best

since 2007

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:Q1

Investment Gains Recovered Significantly in 2010 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.Sources: ISO; Insurance Information Institute.

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

4 82% 4.96%5.04% 4.96% 4 82% 4 82% 4 88% 5.00% 4 93% 5.00%

5.19%6%

4.82% 4.96% 4.96% 4.82% 4.82% 4.88% 4.93%

4.23%3.91%4%

5%

Treasury yield curve remains near its most depressed level

2.29%

3.00%

1 58%2%

3%

near its most depressed level in at least 45 years.

Investment income is falling as a result. Fed is unlikely to hike rates until well into 2012

QE2 Target

0 02% 0 04% 0 10% 0.18%0.41%

1.58%

0.71%1%

2%

June 2011 Yield Curve*

hike rates until well into 2012.

0.02% 0.04% 0.10%0%

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

Pre-Crisis (July 2007)

The End of the Fed’s Quantitative Easing Is Unlikely to Push Interest

106

The End of the Fed s Quantitative Easing Is Unlikely to Push Interest Rates Up Substantially Given Ongoing Economic Weakness

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

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

l Line

s

s Auto

p cial

Auto

Prop

Cas

Suret

yy Lin

esl an

ce**

y

Perso

nal L

Pvt P

ass A

Pers

Prop

Comm

erci

Comm

l Au

Cred

itCo

mm Pr

o

Comm

Ca

Fideli

ty/Su

Warra

nty

Surpl

us Li

Med M

al

WC Reins

uran

.8%

.8%

.0% .9%

.1%

%

-3%-2%-1%0%

-1 -1 -2.

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

5.7%

-1 -2.

-3.1

%

-7%-6%-5%-4%

-5 -7.3%-8%

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

107

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

Shifting Legal Liability & g g yTort Environment

Is the Tort PendulumSSwinging Against Insurers?

108

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

$300 2.50%Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

$250

2.25%

To

y

$150

$200

stem

Cos

ts

2.00%

ort Costs as

$100Tort

Sys

1.75%

% of G

DP

Tort Costs Have Remained High but

$0

$50

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10E 12E1.50%

gRelatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as

the Economy Expands

109

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

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

Business Leaders Ranking of Liability Systems in 2010

Best States1 Delaware

Worst States41 New Mexico

New in 2010N l N t i1. Delaware

2. North Dakota

3 Nebraska

41. New Mexico

42. Florida

43. Montana

North DakotaMassachusettsSouth Dakota

Newly Notorious

New MexicoMontana3. Nebraska

4. Indiana

5. Iowa

43. Montana

44. Arkansas

45. IllinoisDrop-offs

Arkansas

Rising Above

6. Virginia

7. Utah

46. California

47. Alabama

MaineVermontKansas

TexasSouth CarolinaHawaii

8. Colorado

9. Massachusetts

48. Mississippi

49. LouisianaMidwest/West has mix of

10. South Dakota 50. West Virginia

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

good and bad states.

The Nation’s Judicial Hellholes: 2010

West VirginiaIllinoisCook County

Watch ListMadison County, IL

Philadelphia

Atlantic County, NJSt. Landry Parish, LADistrict of Columbia

CaliforniaLos Angeles

NYC and Albany, NYSt. Clair County, ILDishonorable

Mention

Los Angeles and Humboldt

Counties

MentionMI Supreme CourtCity of St. LouisCO Supreme Court

NevadaClark County

CO S p C

111Source: American Tort Reform Association; Insurance Information Institute

South Florida

Avg. Jury Awards 1999 vs. 2003 and 2008

$7,000

$4,8

38

64 $4,8

85$5,4

46

$5 000

$6,000

38 $2,8

87

$

$4,1

$3,4

99

$3,7

17

$3,7

22

$

$

$4,000

$5,0001999 2003 2008

44 9

$2,3 $

99 901

1,04

6

49$2,000

$3,000

$64

$201 $5

8 9$79

$208

$ 9$

$327 $

8

$0

$1,000

Overall Vehicular Premises Wrongful Medical ProductsOverall Vehicularliability

Premisesliability

Wrongfuldeath*

Medicalmalpractice

Productsliability

*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.

Sum of Top 10 Jury Awards 2004-2010

$6,000

$5,159$5,000

$2,954$3,000

$4,000

$1,344 $1,511$1,568$2,000

$3,000

$815$616

$0

$1,000

$02004 2005 2006 2007 2008 2009 2010

Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009, and 2010.

InflationInflation

Is it a Threat to Claim Cost SSeverities

114

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

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

dit b bbl d d i fl ti

Higher energy, commodity and food prices are pushing up inflation in 2011

3.8 3.8

5.14.9

4 0

5.0

6.0 commodity bubble reduced inflationary pressures in 2009/10

up inflation in 2011, but not longer turn

inflationary expectations.

2.8 2.6

1 51.9

3.3 3.4

2.5 2.3

3.0

3.8

2.8

3.8

1.6

3.0

2.2 2.1 2.2

2.92.4

3.23.0

2.0

3.0

4.0

1.5 1.31.6

0.0

1.0

2.0

-0.4-1.090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F

The slack in the U.S. economy suggests that inflation should not heat up

115Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 6/11 (forecasts).

before 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns

Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years

1589.81800

All ItemsMedical Care

1500

100) A claim that cost $1,000 in 1961

would cost nearly $16,000 based on

719.8900

1200

alue

(196

1=

would cost nearly $16,000 based on medical cost inflation trends over the

past 50 years.

300

600

Inde

x V

a

0

300

61 66 71 76 81 86 91 96 01 06 1*

6 6 7 7 8 8 9 9 0 0 11

*Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics)

Regulatory Environment & Financial Services Reform

Insurers Not as Impacted as Banks But Dodd FrankBanks, But Dodd-Frank

Implementation Has Been a Concern for Insurers

117

Concern for Insurers

Financial Services Reform:What does it mean for insurers?

Systemic Risk and Resolution Authority

The Dodd Frank Wall Street Reform and Consumer Protection Act

Creates the Financial Stability Oversight Council and the Office of Financial Research

Regulator representative is MO Insurance Commissioner Huff

No industry representative has been appointed yet

Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurers

Concern some insurers may be labeled as systemically risky based on size alone

Federal Insurance Office (FIO)Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury, headed by a Director appointed by the Secretary of Treasury

FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis

IL Insurance Director Michael McGraith will become first FIO Director on June 1

118

Creation of Federal Advisory Committee on Insurance to Advise FIOCONCERN: FIO morphs into quasi/shadow or actual regulator

Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

2010 Property and Casualty InsuranceReport Card

ME

NH

ND

MN

WA

AL

VTMT

AK

B+C-

B

D

A+A

NH

MA

CT

PA

NE

MN

MI

IL

IA

IDOR

NJRI B

DE

NY

MD

SD WI

INOH

NV

WY

= A= B= C= D

B+

B

B+

B+C-

B

B- D-B+

A+B

BC+

B-

C+

C

F D-

WVVA

NC

OK

IL

AZSC

TN

ARNM

KYMOKS

IN

CA

NV

UTCO

D= F= NG

B B+

DB-

B

C+

C-

C-B

C-

C-C+

B+A

B-

B-

D+FD+

Source: James Madison Institute, February 2008.

LATX

HI GAAL

FL

MS

NM

C- B+C-

FC-

B+ C- C+BC+

N t G d d Di t i t f C l bi

Source: Heartland Institute, May 2011

F FNot Graded: District of Columbia

The Strength of the Economy Will Influence P/C InsurerWill Influence P/C Insurer

Growth Opportunities

Growth Would Also Help Absorb pExcess Capital

120

US Real GDP Growth*

0% %% %6%

Real GDP Growth (%) The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

2.7%

0.9%

3.2%

2.3% 2.9%

0.6% 1

.6%

5.0

3.7%

1.7% 2.

6% 3.1%

1.9%

2.0% 3

.2%

3.2%

2.2%

2.1% 2.3%

2.2%

4.1 %

1.1% 1.

8% 2.5% 3

.6%

3.1%

2%

4%

6%

-0.7

%

%

-0.7

%

-4%

-2%

0%

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump,

2011 got off to a sluggish start, but growth is expected

to accelerate in the remainder-4

.0%

-6.8

% -4.9

%-8%

-6%

0 2

3

4

5

6 Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

to accelerate in the remainder of the year. This is a major

positive for insurance demand and exposure growth.

20

00

20

01

20

0 2

20

03

20

04

20

05

20

06

07:1

07: 2

07:3

07:4

08:1

08: 2

08:3

08:4

09:1

09: 2

09:3

09:4

10:1

10: 2

10:3

10:4

11:1

11: 2

11:3

11:4

12:1

12: 2

12:3

12:4

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

121

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/11; Insurance Information Institute.

Conditions, but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly

2011 Financial Overview State Economic Growth Varied in 2010

Hard hit Midwest and Northeast states finally

entering recovery in 2010

122

Texas had one of the stronger economies in 2010 and has

generally outperformed during the economic downturn

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

14In May, 24 states reported over-the-month unemployment rate d 13 d h

12.1

11.7

10.9

10.6

10.3

10.3

0.0

8 8 8 7 7 6

12

14

%)

decreases, 13 states and the District of Columbia had

increases, and 13 had no change.

1 9.8

9.8

9.8

9.7

9.7

9.6

9.4

9.4

9.3

9.1

9.1

9.1

8.9

8.9

8.7

8.6

8.6

8.2

8

10

ent R

ate

(%

4

6

empl

oym

e

2

4

Une

123

0NV CA RI FL MI MS SC DC GA KY NC TN AL ID NJ OR AZ CT WA IL MO CO OH WV IN

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

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

10

In May, 24 states reported over-the-month unemployment rate

decreases 13 states and the District

8.2

8.0

8.0

7.9

7.8

7.7

7.6

7.4

7.4

7.4

7.3

7.3

9

8

10

%)

decreases, 13 states and the District of Columbia had increases, and 13

had no change.

7 7 7 7 76.

96.

86.

66.

66.

06.

06.

06.

05.

45.

34.

84.

8

6

ent R

ate

(%

4 44.

13.

24

empl

oym

e

The unemployment rate in Texas was 8.0% in May, below the 9.0%

overall US rate

0

2Une overall US rate

124

0LA DE TX NY AR ME MA AK PA WI MT UT NM MD KS MN HI IA VA WY VT OK NH SD NE ND

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

Insurance Information Institute Online:

www iii orgwww.iii.org

Thank you for your timed tt ti !and your attention!

Twitter: twitter.com/bob_hartwig_ g

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