Mega Trends in Workers Compensation

Past, Present and Future16th Annual AMCOMP Conference

Las Vegas, NVMarch 27, 2014

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

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Presentation Outline

The Post-Crisis Economy & Workers Compensation The scars of the “Great Recession” are still visible on the WC line

The New American Labor Force The Reindustrialization of America The Future of Healthcare in the United States

WC’s future in inextricably linked to influences in this key sector

Workers Compensation Operating Result Update Workers Compensation: The Next 100 Years Q&A

The Slow and Uneven Nature of the Economic Recovery Is

Changing the WC Playing Field

3

Despite a Still-Sluggish Economy, there Are Potent Growth Drivers for Workers

Comp and Commercial Insurers in General3

4

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/14; Insurance Information Institute.

2.7%

0.5%

3.6%

3.0%

1.7%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

1.4%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

1.1% 2.

5%4.

1%2.

6%1.

9% 2.8% 3.0%

3.1%

3.0%

3.0%

3.0%

2.9%

0.4%

-8.9%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   20

00   

   20

01   

   20

02   

   20

03   

   20

04   

   20

05   

   20

06   

07:1

Q07

:2Q

07:3

Q07

:4Q

08:1

Q08

:2Q

08:3

Q08

:4Q

09:1

Q09

:2Q

09:3

Q09

:4Q

10:1

Q10

:2Q

10:3

Q10

:4Q

11:1

Q11

:2Q

11:3

Q11

:4Q

12:1

Q12

:2Q

12:3

Q12

:4Q

13:1

Q13

:2Q

13:3

Q13

:4Q

14:1

Q14

:2Q

14:3

Q14

:4Q

15:1

Q15

:2Q

15:3

Q15

:4Q

Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

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

market contraction was severe

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

2014/15 are expected to see a

modest acceleration in growth

5

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

13.4

4.8

3.9

3.6

3.5

3.5

3.4

3.3

3.3

3.3

2.7

2.7

2.6

2.4

2.4

2.4

2.4

2.2

2.2

2.2

2.2

2.1

2.1

2.1

2.1

2.0

0

2

4

6

8

10

12

14

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

Perc

ent C

hang

e (%

)

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

North Dakota was the economic growth juggernaut of the US

in 2012—by far

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

a more typical recovery

6

1.9

1.7

1.6

1.5

1.5

1.5

1.5

1.4

1.4

1.4

1.3

1.3

1.3

1.2

1.2

1.1

1.1

0.7

0.5

0.5

0.4

0.2

0.2

0.2

0.2

-0.1

-0.4-0.20.00.20.40.60.81.01.21.41.61.82.0

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

Perc

ent C

hang

e (%

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

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

Connecticut was the only state to shrink in 2012

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

1% in 2012

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

.567

.5 69.8 74

.371

.563

.755

.7 59.5 60.9 64

.169

.9 75.0

75.3

76.2

76.4 79

.373

.272

.3 74.3

82.6

82.7

74.5

73.8 77

.678

.6

84.5

84.1

85.1

82.1

77.5

73.2 75

.182

.581

.281

.679

.9

76.4

40

45

50

55

60

65

70

75

80

85

90

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Consumer Sentiment Survey (1966 = 100)

January 2010 through March 2014

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially over the past 2+ years, though

uncertainty in Washington sometimes takes a toll.Source: University of Michigan; Insurance Information Institute

Optimism among consumers dropped in Q3 2013 as the

government shutdown created uncertainty, then rebounded

though the harsh winter took a toll

8

Impact of 2011 budget impasse

9

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1.85 1.

96 2.07

1.80

1.36

0.91

0.55 0.59 0.61

0.78 0.

921.

091.

31 1.44 1.

501.

511.

50

1.351.

461.

291.

201.

011.

19

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (3/14 and 3/13); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

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

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction

for several more years

10

Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2013*

$1.1

6$1

.18

$1.2

2

$1.4

4$1

.48

$1.4

9$1

.50

$1.4

9$1

.43

$1.3

7$1

.27

$1.2

1$1

.18

$1.1

7$1

.17

$1.1

8$1

.20

$1.2

4 $1.2

8 $1.3

5$1

.37 $1

.42

$1.4

6 $1.5

1$1

.53

$1.5

6$1

.57

$1.1

3

$1.2

5 $1.3

0$1

.39

$1.0

$1.1

$1.2

$1.3

$1.4

$1.5

$1.6

06:Q

106

:Q2

06:Q

306

:Q4

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

;Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

3

Outstanding loan volume has been growing for over two yearsand (as of year-end 2012) surpassed previous peak levels.

*Latest data as of 2/2/2014.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

$Trillions In nominal dollar terms, this is an

all-time high.

Recession

50.7 52

.7 54.1

54.6

54.8

53.5

53.7

52.8 53

.9 54.6 56

57.1 59

.459

.756

.354

.453

.353

.453

.852

.652

.652

.652

.653

.056

.856

.155

.053

.754

.152

.752

.9 54.3 55

.254

.854

.8 55.7

55.2 56

.0

53.1

53.7

52.2

56.0 58

.654

.4 55.4

53.9

53.0 54

.051

.6

54.4

40

45

50

55

60

65

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)January 2010 through February 2014

Non-manufacturing industries have been expanding and adding jobs. This trend is likely to continue through 2014.

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

Optimism among non-manufacturers was hurt by

the uncertainty in Washington, but remains

resilient

11

12

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

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8247

,806

40,0

7533

,212

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 12 13

Business Bankruptcy Filings,1980-2013

Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2013 bankruptcies totaled 33,212, down 17.1% from 2012—the fourth

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%

12

13

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013: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

$6,750

$7,000

$7,250

$7,50005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

213

:Q3

13:Q

4

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2013:Q4) was $7.23 trillion, a new peak--$980B

above 2009 trough

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

5.3% from prior peak

Payrolls are 15.7% above

their 2009 trough and up 2.0% over

the past year

13

14

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

15

The Construction Sector Is Critical to the Economy and

the WC Insurers15

16

Value of New Private Construction: Residential & Nonresidential, 2003-2013*

Billions of Dollars

$0$100$200$300$400$500$600$700$800$900

$1,000

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

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2013: Value of new pvt. construction hits $667.5B, up

33% from the 2010 trough but still

27% below 2006 peak

16

$261.8

$238.8

$311.5

$356.0

*2013 figure is a seasonally adjusted annual rate as of December.Sources: US Department of Commerce; Insurance Information Institute.

18

Value of Construction Put in Place, January 2014 vs. January 2013*

2.5%

-22.2%

3.0%

9.3%12.3%

14.6%9.7%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

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

Growth (%)

Private sector construction activity is now up in the

residential and nonresidential segments

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

Private: +12.3% Public: +2.5%

Public sector construction activity remains low but is no

longer contracting

19

Value of Private Construction Put in Place, by Segment, Jan. 2014 vs. Jan. 2013*

14.9%

-3.9%

1.7%

-12.2%

7.8%

41.0%

0.9%7.9%

13.8%12.3% 14.6%9.7%

47.8%

17.0%

-20%-10%

0%10%20%30%40%50%60%

Tota

l Priv

ate

Cons

truct

ion

Resi

dent

ial

Tota

lNo

nres

iden

tial

Lodg

ing

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Relig

ious

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Com

mun

icat

ion

Pow

er

Man

ufac

turin

g

Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector; Bodes Well for Early 2014

Growth (%) Led by the Residential Construction, Lodging, Communication and Office segments, Private

sector construction activity is rising after plunging during the “Great Recession.”

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

20

Private Construction by Segment/Project Type, Jan. 2014 vs. Jan. 2013*

-3.6%

5.0%0.9%

42.6%

-30.3%

0.6%

20.6%

-3.9%-5.9%-1.6%

-16.6%

33.4%41.0%

12.3%21.0%

28.0%17.0%

-24.2%-40%-30%-20%-10%

0%10%20%30%40%50%

Tota

l Priv

ate

Cons

truct

ion

Resi

dent

ial:

Sing

le F

amily

Resi

dent

ial:

Mul

ti-Fa

mily

Offi

ce: G

ener

al

Offi

ce:

Fina

ncia

l

Auto

mot

ive

Food

/Bev

erag

e

Reta

il: G

ener

alM

erch

andi

seRe

tail:

Shop

ping

Cent

er

Shop

ping

Mal

l

Drug

Sto

re

Build

ing

Supp

ly

Oth

er S

tore

s

War

ehou

se:

Com

mer

cial

War

ehou

se:

Min

i-Sto

rage

Hosp

itals

Med

ical

Build

ing

Spec

ial C

are

Private Construction Activity is Up in Many Segments, Including the Key Residential Construction Sector, But Down in a Few

Growth (%) Shopping malls/centers and warehouse construction are

among the strongest nonresidential segments

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

Florida Total Private Housing Starts,2000 – 2017F

21

The economic outlook for most of

the US is positive for the first time in many

years

Source: University of Central Florida Institute for Economic Competitiveness: http://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspx

CRASH, CRATER, RECOVERY Homebuilding in FL continues

to recover, but employment and WC exposures will take

more than a decade to recover

(Thousands of Units)

22

$314.9 $304.0$286.4 $279.0 $274.4

$216.1 $220.2$234.2

$255.4

$289.1$308.7

$0

$50

$100

$150

$200

$250

$300

$350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

($ Billions)

Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments

Grapple with Deficits and Federal Sequestration Takes Hold

Value of New Federal, State and Local Government Construction: 2003-2013*

*2013 figure is a seasonally adjusted annual rate as of December.Sources: US Department of Commerce; Insurance Information Institute.

Construction across all levels of government

peaked at $314.9B in 2009

Austerity Reigns Govt. construction is still shrinking, down $40.5B or

12.9% since 2009 peak

23

Value of Public Construction Put in Place, by Segment, Jan. 2014 vs. Jan. 2013*

-6.2%-3.0%-0.6%

-15.1%

7.8%

15.3%

3.6%

-10.8%-6.2%

8.7%2.5%

-22.2%

3.0%

-9.9%

-27.8%-30%-25%-20%-15%-10%

-5%0%5%

10%15%20%

Tota

l Pub

licCo

nstru

ctio

n

Resi

dent

ial

Tota

lNo

nres

iden

tial

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Publ

ic S

afet

y

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Pow

er

High

way

&St

reet

Sew

age

&W

aste

Dis

posa

l

Wat

er S

uppl

y

Cons

erva

tion

&De

velo

p.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2014.

Growth (%)

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

Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging

on public entity risk exposures

Highway, Transport, and Power projects lead public sector

construction

25

Construction Employment,Jan. 2010—February 2014*

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

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

6 5,58

35,

576

5,57

7 5,61

25,

629

5,64

45,

640

5,63

65,

615

5,62

25,

627

5,63

05,

633

5,64

95,

673 5,71

15,

735 5,

783

5,79

95,

792

5,79

15,

801

5,80

45,

805

5,82

25,

830

5,84

95,

876 5,

926

5,94

1

5,400

5,500

5,600

5,700

5,800

5,900

6,000

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14Ja

n-14

Construction employment is +506,000 above

Jan. 2011 (+9.3%) trough

(Thousands)

Construction and manufacturing employment constitute 1/3 of all payroll exposure.

26

Construction Employment, Jan. 2003–February 2014

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

5,000

5,500

6,000

6,500

7,000

7,500

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

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

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

Construction employment

troughed at 5.435 million in Jan.

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

plunge from the April 2006 peak

26

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of Feb. 2014 totaled 5.941 million, an

increase of 506,000 jobs or 9.3% from the

Jan. 2011 trough

27

The New American Labor Force

The Recovery’s Winners and Losers Are Reshaping the Sources of WC’s

Payroll Exposure Base

27

28

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 6.7% in February 2014.

4% to 6% is “normal.”

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 12.6% in Feb. 2014.8% to 10% is

“normal.”

January 2000 through February 2014, Seasonally Adjusted (%)

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

28

As the unemployment rate approaches 6%,

the Fed will begin signaling on short-

term rates

29

US Unemployment Rate Forecast4.

5%4.

5% 4.6% 4.8% 4.9% 5.

4%6.

1%6.

9%8.

1%9.

3% 9.6% 10

.0%

9.7%

9.6%

9.6%

8.9% 9.1%

9.1%

8.7%

8.3%

8.2%

8.0%

7.8%

7.7%

7.6%

7.3%

7.0%

6.6%

6.5%

6.3%

6.2%

6.1%

6.0%

5.9%

5.8%

9.6%

4%

5%

6%

7%

8%

9%

10%

11%

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

Rising unemployment

eroded payrolls

and WC’s exposure base.Unemployment peaked at 10%

in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/14 edition); Insurance Information Institute.

2007:Q1 to 2015:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 6.0% by Q4 of this year.

Jobless figures have been revised

slightly downwards for 2014/15

231

5217

052

126

573

-71

32 64 81 553

-115

-106

-221

-215

-206

-261

-258

-422

-486

-776 -6

93-8

21-6

98-8

10-8

01-2

94-4

26-2

72 -232

-141

-271

-15

-232

20-3

819

294 11

012

011

710

7 199

149

94 7222

323

1 320

166

186 21

912

526

817

719

1 222

364

228

246

102 131

7517

213

615

9 255

211

215

219 26

316

4 188 22

220

117

018

015

3 247 272

8614

516

2

113

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08Fe

b-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Monthly Change in Private Employment

January 2007 through February 2014 (Thousands, Seasonally Adjusted)

Private Employers Added 8.34 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 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

162,000 private sector jobs were

created in February

30

Jobs Created2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill

0.02

0-0

.018

0.09

50.

287

0.38

10.

491

0.61

10.

728

0.83

51.

034

1.18

31.

277

1.34

91.

572

1.80

32.

123

2.28

92.

475

2.69

42.

819

3.08

73.

264

3.45

53.

677

4.04

14.

269

4.51

54.

617

4.74

84.

823

4.99

55.

131

5.29

05.

545

5.75

65.

971

6.19

06.

453

6.80

57.

027

7.22

87.

398

7.57

87.

731

7.97

88.

250

8.33

68.

481

8.64

3

6.61

7

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mill

ions

Cumulative Change in Private Sector Employment: Jan. 2010—Feb. 2014January 2010 through February 2014* (Millions)

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

Cumulative job gains through Feb. 2014

totaled 8.64 million

32

Job gains and pay increases have added

nearly $1 trillion to payrolls since Jan. 2010

Private Employers Added 8.64 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

4-1

033

9251

128

798

-68

-224 -1

84-1

94-2

13-2

24-2

71-2

89-2

88-3

56 -324

-452

-449

-480

-488

-511

-530

-542

-536

-539

-547

-574 -565

-589 -555 -535

-592

-601

-606

-622 -609

-610

-621

-643

-654 -623

-616

-633 -618

-631-621

-800

-600

-400

-200

0

200

400

600

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Cumulative Change in Government Employment: Jan. 2010—Dec. 2013January 2010 through Dec. 2013* (Millions)

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

Cumulative job losses through Dec. 2013 totaled 631,000

33

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

Financial Crisis: Sequestration Will Add to this Toll

Government at all levels has shed more than 600,000 jobs

since Jan. 2010 even as private employers created 8.14 million jobs, though losses may now

be stabilizing.

Temporary Census hiring distorted 2010

figures

34

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

-631

-424

-100 -107

-700

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 424,000 from Jan.

2010 through Dec. 2013, accounting for 67% of all government job losses,

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

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

State government employment fell by 1.9% since the end of 2009 but is

recovering while Federal employment is down by 3.8% and deteriorating

35

Unemployment Rates by State, February 2014:Highest 25 States*

9.0

8.7

8.5

8.0

7.8

7.7

7.4

7.4

7.3

7.1

7.1

7.1

7.0

6.9

6.9

6.8

6.7

6.7

6.5

6.5

6.5

6.4

6.4

6.4

6.4

6.2

6.2

0

2

4

6

8

10

RI IL NV CA KY MI DC MS AZ AR GA NJ CT OR TN NY US NM AK MA OH AL MO NC WA FL PA

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for February 2014, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In February, 29 states had over-the-month unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change.

36

6.1

6.1

6.1

6.1

6.0

6.0

5.7

5.7

5.7

5.3

5.1

5.0

4.9

4.9

4.8

4.7

4.6

4.5

4.4

4.2

3.9

3.7

3.6

3.6

2.6

0

1

2

3

4

5

6

7

CO IN ME WI DE WV MD SC TX ID MT OK KS VA MN NH HI LA IA WY UT VT NE SD ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, February 2014: Lowest 25 States*

*Provisional figures for February 2014, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In February, 29 states had over-the-month unemployment rate decreases, 10 states had increases, and 11 states

and the District of Columbia had no change.

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

39

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2013E

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2013 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2014; +8.6% Growth Estimated for 2013

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

+8.5% in 2013E

40

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

48 49 50 51 52 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 12 13

Men Women

Labor Force Participation Rate by Gender, 1948—2013(Percent)

Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

86.6% or working age men participated in the

labor force in 1948 compared to 32.7% or

women

By 2013, 57.2% of working age women participated in the

labor force, up from 32.7% in 1948 but down from its all time

high of 60.0% in 1999

By 2013, the labor force participation rate for men had

declined to 69.7% while the participation rate for women

had risen to 57.2%

41

Labor Force Participation by Sex and Education through the Crisis: 2006, 2010 and 2013

4.1%2.2%

9.6%10.5%

8.6%

13.9%

11.5%

6.0%7.6% 7.1%

9.7%7.9%

5.0%4.6% 4.6% 4.6%5.9%

7.4%

0%2%4%6%8%

10%12%14%16%

All Men Women Less than HSDiploma

HS Diploma,No College

Bachelor'sDegree or

Higher

2006 2010 2013

The composition and character of the U.S. labor force is changing rapidly. Winners and losers have clearly emerged. What does this mean for WC?

Unemployment Rate (%)

Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

Men were hit harder and continue to do worse than women in the job market.

Women are likely to do better than men for the

indefinite future.

Workers lacking a college degree suffer from much

higher rates of unemployment

42

Unemployment Rates by Age and Race: 2006, 2010 and 2013

5.2% 4.0%

9.6%

24.9%

18.0%16.0%

12.5%

8.7%

22.9%

13.5% 13.1%

9.1%6.5%

4.6%

15.3%

10.0% 9.0%7.4%

0%

5%

10%

15%

20%

25%

30%

All 16-19 16-24 Black orAfrican

American

Hispanic orLatino

White

2006 2010 2013

Unemployment Rate (%)

Unemployment among younger workers remains

a chronic problem

Source: U.S. Bureau of Labor Statistics; Insurance Information Institute.

Unemployment among some minority groups remains far above pre-

recession levels

Labor Force Participation Rate, Ages 65-69, Quarterly, 1998:Q1-2013:Q21998.1

1998.3

1999.1

1999.3

2000.1

2000.3

2001.1

2001.3

2002.1

2002.3

2003.1

2003.3

2004.1

2004.3

2005.1

2005.3

2006.1

2006.3

2007.1

2007.3

2008.1

2008.3

2009.1

2009.3

2010.1

2010.3

2011.1

2011.3

2012.1

2012.3

2013.1

20%

22%

24%

26%

28%

30%

32%

34%

22.1%

22.5%

22.3% 23.0%

22.8%

23.0%

22.9% 23.5% 24.4%

24.4%

24.3% 24.9%

24.4%

24.4%

24.8%

25.2%

25.2% 26.3%

26.5%

26.2%

27.9%

27.2%

27.0%

27.4%27.9%

27.3%27.8%

27.6%

26.8% 27.6%

29.3%

29.5%

27.9% 28.5%

28.7%

30.8%

29.3% 30.1%

29.1%30.3%

30.1% 30.9%

31.0%

30.7%

31.0%

31.4%

30.9%

31.2%

31.6%

31.3%

31.5%

31.4%32.8%

32.3%

31.1% 32.2%

32.2%

32.5%

31.8%

31.8%

31.7%32.9%

Not seasonally adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

The brown bars indicate recessions.

Labor Force participation rate

The labor force participation rate for workers 65-69 might grow even faster in the future as seniors find they can’t fully retire on their meager retirement savings.

1 in 3 in this age group are working. Virtually

none of them are “baby boomers”

Labor Force Participation Rate,Ages 70-74, Quarterly, 1998:Q1-2013:Q2

1998

.1

1998

.3

1999

.1

1999

.3

2000

.1

2000

.3

2001

.1

2001

.3

2002

.1

2002

.3

2003

.1

2003

.3

2004

.1

2004

.3

2005

.1

2005

.3

2006

.1

2006

.3

2007

.1

2007

.3

2008

.1

2008

.3

2009

.1

2009

.3

2010

.1

2010

.3

2011

.1

2011

.3

2012

.1

2012

.3

2013

.1

9%

12%

15%

18%

21%

12.5%

12.2%

12.4% 12.9%

12.4%

13.6%

13.1%

13.1%

13.3%

13.5%

13.6%

13.8% 14.4%

13.7% 14.2%

14.2%

13.8% 14.2%

14.0%

14.0% 14.4%

14.4%

14.6%

14.9%

14.9% 15.4%

15.6%

15.3%16.4% 17.0%

15.8% 16.2% 16.7%

16.9%

17.2%

17.0%

16.7%

16.8%

18.0%

17.5%

17.3%

16.9%

18.6%

18.2%

17.7%

17.9%18.9%

19.2%

18.0%

18.1%

17.4%18.4%

18.0% 18.4%19.3%

19.5%

19.2%

19.1% 19.9%

19.6%

18.8% 19.3%

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

Labor Force participation rate

The labor force participation rate for workers 70-74 grew by about 50% since 1998.Growth stalled during and after the Great Recession but has since resumed.

Nearly 1 in 5 in this age group is working.

A dozen years ago it was 1 in 8.

50

The Reindustrialization of America

American Industrial Might Is Making a Comeback

A Golden Opportunity for Workers Comp Insurers?

50

51

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Dec. 2013

*seasonally adjusted; Dec. 2013 is preliminary; data published February 4, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Dec. 2013 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial

exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

51

The value of Manufacturing Shipments in Dec. 2013 was $492.7B—a near record high.

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

.459

.759

.754

.2 55.8

51.4 52

.552

.551

.852

.2 53.1 54

.151

.9 53.3 54

.152

.550

.250

.550

.7 51.6

51.7

49.9

50.2

53.1 54

.2

50.7

49.0 50

.955

.455

.756

.256

.4 57.3

57.0

51.9 53

.2

51.3

40

45

50

55

60

65

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

ISM Manufacturing Index(Values > 50 Indicate Expansion)January 2010 through February 2014

The manufacturing sector expanded for 48 of the 50 months from Jan. 2010 through February 2014. Weakness in early 2014 stems largely from

harsh winter weather and weakness in China.Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

Manufacturing continued to expand in early 2014

52

53

Manufacturing Growth for Selected Sectors, 2013 vs. 2012*

3.0%0.0%

-3.4%

8.1%

0.2%2.7%

-1.8%-0.5%

3.1%

6.9%

1.7%3.1%

14.0%

0.4% 1.3%

-6%-4%-2%0%2%4%6%8%

10%12%14%16%

All

Man

ufac

turin

g

Dur

able

Mfg

.

Woo

dP

rodu

cts

Prim

ary

Met

als

Fabr

icat

edM

etal

s

Mac

hine

ry

Ele

ctric

alE

quip

.

Com

pute

rs &

Ele

ctro

nics

Tran

spor

tatio

nE

quip

.

Non

-Dur

able

Mfg

.

Food

Pro

duct

s

Pet

role

um &

Coa

l

Che

mic

al

Pla

stic

s &

Rub

ber

Text

ileP

rodu

cts

Manufacturing Is Expanding—Albeit Slowly—Across a Number 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 was especially

strong in 2012 but weakened in 2013

*Seasonally adjusted; Date are YTD comparing data through November 2013 to the same period in 2012.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +3.4% Non-Durables: +0.2%

54

Durable Manufacturing: New Order Growth and Shipments, 2013

10.1%

2.3%

6.4%3.9%

1.2%

7.8%

-2.8%

5.7%

10.2%8.3%

3.6%1.3%

2.9%

-3.2%

3.6%

-4%-2%0%2%4%6%8%

10%12%

All

Dur

able

Mfg

: N

on-D

efen

se

Prim

ary

Met

als

Fabr

icat

edM

etal

s

Mac

hine

ry

Com

pute

rs &

Ele

ct. E

q.

Com

mun

icat

ions

Equ

ipm

ent

Mot

or V

ehic

les

& P

arts

Non

-Def

ense

Cap

ital G

oods

Shipments New Orders

Manufacturing Is Expanding: New orders exceed shipments which suggests the industry is in an expansionary phase

Growth (%)Most manufacturing sectors indicate

order growth outstripping shipments, a favorable indicator for

investment and expansion

*Seasonally adjusted; Date are advance report YTD data comparing data through December 2013 to the same period in 2012.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Jun

01Se

pD

ecM

ar 0

2Ju

n 02

Sep

Dec

Mar

03

Jun

03Se

pD

ecM

ar 0

4Ju

n 04

Sep

Dec

Mar

05

Jun

05Se

pD

ecM

ar 0

6Ju

n 06

Sep

Dec

Mar

07

Jun

07Se

pD

ecM

ar 0

8Ju

n 08

Sep

Dec

Mar

09

Jun

09Se

pD

ecM

ar 1

0Ju

n 10

Sep

Dec

Mar

11

Jun

11Se

pD

ecM

ar 1

2Ju

n 12

Sep

Dec

Mar

13

Jun

13Se

p

Dec

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. 55

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 79.2% of industrial capacity in Dec. 2013, well above the June

2009 low of 66.9% but is still below pre-recession levels.

December 2007-June 2009 Recession

March 2001 through December 2013

55

56

Manufacturing Employment,Jan. 2010—February 2014*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,951

11,9

6511

,988

11,9

8411

,977

11,9

7211

,965

11,9

4811

,963

11,9

9312

,011

12,0

4612

,053

12,0

5912

,065

11,250

11,500

11,750

12,000

12,250Ja

n-10

Feb-

10M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

2/30

/2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14

Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.

*Seasonally adjusted; Jan. and Feb. 2014 are preliminarySources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands) Since Jan 2010, manufacturing employment

is up (+605,000 or +5.3%)and still growing.

57

2.5%

4.9%

6.3%

7.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2013 2014F 2015F 2016F

Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth

Accelerating business investment will be a potent driver of

commercial property and liability insurance exposures and should drive employment and WC payroll

exposures as well (with a lag)

Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.

U.S. Natural Has Imports and Exports, 1990 - 2040

Sources: US Energy Information Administration, Annual Energy Outlook 2014 Early Release Overview; ;Insurance Information Institute. 58

Trillions of Cubic Feet

The US is now the largest gas producer in the world, though Russia is the

largest exporter. The US needs to

invest in its pipeline and

LNG infrastructure and expedite

regulatory approval to

realize its full export potential

59

Oil & Gas Extraction Employment,Jan. 2010—Feb. 2014*

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

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

616

9.3

170.

117

1.0

172.

517

3.6

176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

2.6

193.

119

3.3

195.

019

6.5

199.

720

0.6

203.

020

4.1

206.

120

7.8

150

160

170

180

190

200

210

220

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Oil and gas extraction employment is up 32.9% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in

the US.

(Thousands) Highest since Aug.

1986

60

Growth in Health Professions,1991-2013

Sources: Bureau of Labor Statistics, Insurance Information Institute.

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Health care

Total nonfarm

(Percent Annual Change)

Healthcare employment has continued to grow in good times and bad - including the Great Recession.

Average Annual Growth AverageHealthcare: 2.5%

Total Nonfarm: 1.0%

The U.S. economy lost more than 8 million jobs during the Great Recession, but health sector

employment expanded

Healthcare SupportHealthcare Practitioners

ConstructionPersonal Care and Service

Computer and MathSocial Service

Business & FinancialGroundskeeping/Janitorial

EducationAll Occupations

LegalLife, Phys and Social Science

RepairFood Preparation

TransportationFire, Police, Etc.

Architects and EngineersSales

ManagementArts and Media

Administrative SupportProduction

Farming

28.121.521.4

20.918

17.212.512.5

11.110.810.7

10.19.69.4

8.67.9

7.37.37.276.8

0.8-3.4

Source: Bureau of Labor Statistics, Insurance Information Institute.

Occupations Ranked by Projected Percentage Growth, 2012-2022F (Millions)

61

Healthcare professions are expected to grow at 2 to

nearly 3 times employment growth overall

62

The Future of Healthcare in America

Workers Comp Is Increasingly Along for the Ride in the

American Health Care Saga

62

U.S. Health Care Expenditures,1965–2022F

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$42.

0$4

6.3

$51.

8$5

8.8

$66.

2$7

4.9

$83.

2$9

3.1

$103

.4$1

17.2

$133

.6$1

53.0

$174

.0$1

95.5

$221

.7$2

55.8

$296

.7$3

34.7

$369

.0$4

06.5

$444

.6$4

76.9

$519

.1$5

81.7

$647

.5$7

24.3

$791

.5$8

57.9

$921

.5$9

72.7

$1,0

27.4

$1,0

81.8

$1,1

42.6

$1,2

08.9

$1,2

86.5

$1,3

77.2

$1,4

93.3

$1,6

38.0

$1,7

75.4

$1,9

01.6

$2,0

30.5

$2,1

63.3

$2,2

98.3

$2,4

06.6

$2,5

01.2

$2,6

00.0

$2,7

00.7

$2,8

06.6

$2,9

14.7

$3,0

93.2

$3,2

73.4

$3,4

58.3

$3,6

60.4

$3,8

89.1

$4,1

42.4

$4,4

16.2

$4,7

02.0

$5,0

08.8

U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,

inflation of GDP growth

63

From 1965 through 2013, US health care expenditures had

increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have

increased 119 fold.

$ Billions

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

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 12 13 14 15 16 17 18 19 20 21 22

National Health Care Expenditures as a Share of GDP, 1965 – 2022F*

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

1965 5.8%

Health care expenditures as a share of GDP rose from 5.8% in 1965 to 18.0% in 2013 and are expected to

reach 19.9% of GDP by 2022

% of GDP

2022 19.9%

1980: 9.2%

1990: 12.5%

2000: 13.8%

2010: 17.9%

Since 2009, heath expenditures as a %

of GDP have flattened out at about 18%--the

question is why and will it last?

65

63.1%650.7%

2235.9%

6839.8%

0%

1000%

2000%

3000%

4000%

5000%

6000%

7000%

8000%

Population CPI GDP Health CareExpenditures

Rate of Health Care Expenditure Increase Compared to Population, CPI and GDP

Accelerating business investment will be a potent driver of

commercial property and liability insurance exposures and should drive employment and WC payroll

exposures as well (with a lag)

Source: Insurance Information Institute research.

1965: 194.3 Mill2013: 317.0 Mill

1965: $719.1 Bill2013: $16,797.5 Bill

1965: $42.0 Bill2013: $2,914.7 Bill

-1%

0%

1%

2%

3%

4%

5%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Change in Medical CPI CPI-All Items

Medical Cost Inflation vs. Overall CPI, 1995 - 2013

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

Average Annual Growth AverageHealthcare: 3.8%Overall CPI: 2.4%

Though moderating, medical inflation will continue to exceed inflation in the overall economy

67

Possible Effects of the Affordable Care Act (“ObamaCare”) on

Workers Compensation

67

4.5%3.5%

2.8%3.2%3.5%4.1%4.6%4.7%

4.0%4.4%4.2%4.0%4.4%3.7%

3.2%3.4%3.0%

5.1%

7.4%

10.1% 10.6%

13.5%

5.4%

7.8%

6.3%6.6%

4.1%3.6% 4%

3%

1.4%

5.4%

8.8%7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate

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

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

the gap is narrowing.

Issue Concern Contravening Argument

Surge in People Covered by Health Insurance

• System is overwhelmed

• MD shortage

• Patient care adversely impacted

• Over time, people will have access to preventative care, improving the general health of the population

• Greater use of PA’s, etc.

Electronic Health Records • Cost

• Computerization of patient data could help flag issues and improve risk management and improve patient outcomes

Claim Shifting• Provider/patient may

prefer claim handled via WC system

• Reduction in uninsured population reduces shifting

Source: Insurance Information Institute research; WCRI. 69

A Few Potential Impacts of the ACA on Workers Compensation

0%

50%

100%

150%

200%

250%

300%

350%

MA HI

WV

MD FL CA TX M

I

UT

VT

NY

NC

PA

OH

WA

CO

ND

SC KY KS

SD WY

AR

OK

GA

MN

ME

MO

AZ NM TN LA MS

AL NE

CT

OR

NV ID RI

IL AK

● WC rates often tied to WC but can change for reasons independent of this link

● There could be both positive and negative effects of a cut in Medicare rates on WC performance in states which tie reimbursement to Medicare

– WC reimbursement rates would go down

– Doctors may be unwilling to see WC patients: 64% of Dr.’s surveyed said they would stop accepting new Medicare patients if planned rate cuts

go through; some of these same doctors may also refuse WC patients if WC rates also decrease

● These effects would likely be short lived

– All states which tie their fee schedules to Medicare already increase the Medicare rates to set WC rates, so any drop in the Medicare rates would likely be soon offset by a higher WC adjustment

ACA Impact on WC May Occur via Changes in Rates Set by State Regulators

WC Maximum Allowable Reimbursement Rates as Percentage of Medicare

SOURCE: NCCI Annual Issues Symposium 2009, Medicare’s Impact on Workers’ Compensation, AMA: “Physicians’ reactions to the Medicare physician payment cuts” from 3/13/13 presentation by Christopher Cunniff, FCAS, of Liberty Mutual.

WC rates tied to Medicare

WC rates not tied to Medicare

PPACA May Have Distinct Impacts on WC Depending on Claim Frequency/Severity

High Volume, Low

Severity

Complicated

Catastrophic Injuries

• Expanded coverage may shift some small claims to the health insurance system (+)

• Physician access problems could lead to indemnity increases and may bleed into the complicated cases (-)

• Preventative care and early record keeping decreases WC comorbidities (+)

• Soft tissue treatments, a large portion of “slow burn claims,” may decrease in cost (+)

• No significant impacts

Ex: med only, quick to settle, <25K

Ex: back pain claims, very litigious

Ex: spinal cord injury, multiple trauma claims

Potential ACA Impact

SOURCE: Dr. Glenn Pransky, Liberty Mutual Research Institute for Health & Safety extracted from from 3/13/13 presentation by Christopher Cunniff, FCAS, of Liberty Mutual: Impacts of Healthcare Reform on Workers Compensation,

Industry Portfolio by Claim Type(Relative Volume by Claim Frequency & Paid Dollars)

73

AK

States of Play | Management of Health-Insurance Exchanges & ObamaCareSome states are running new health-insurance exchanges on their own. Other are leaving some or all of the task to the federal government.

ME

PA

WV VA

NC

LATX

OK

NE

NDMN

MI

IL

IA

ID

WA

OR

AZ

NJ

VT

NY

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SD WI

IN OH

MT

CA

NVUT

WY

CO

NH

DEMD

MARICT

HI

Source: Wall Street Journal, September 20, 2013.

Federally Run exchange

State-runexchangeFederal and state joint-runexchange

RI

CT

NJ

DE

MDDC

Number of People Signed Up for Health Care Under the ACA, Oct. 1 – March 1

74

759,800

Source: Centers for Medicare and Medicaid as of March 7, 2014: http://aspe.hhs.gov/health/reports/2014/MarketPlaceEnrollment/Mar2014/ib_2014mar_enrollment.pdf

As of March 1, 4.2 million people have signed up for coverage under the ACA

since enrollment opened on Oct. 1, 2013

UPDATEHHS

announced that

enrollment as of 3/16 now exceeds 5

million

75

Projected Number of People with No Health Insurance, 2013—2022*

31

55

4437

30

5

15

25

35

45

55

65

2013E 2014F 2015F 2018F 2022F

Millions

The projected decline in the uninsured population is very sensitive to the enrollment rate under the Affordable Care Act

By 2018 the number of people under age 65 without

insurance is expected to drop by 25 million (~45%)

75

*Under age 65.Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

Will Skill Shortages in the Medical Field Adversely

Impact WC?

76

Concern that the ACA Will Overwhelm the Healthcare Delivery System, Harming

Outcomes76

Physician Supply and Demand, 2008–2020

Source: American Association of Medical Colleges https://www.aamc.org/advocacy/campaigns_and_coalitions/fixdocshortage/; Insurance Information Institute. 77

A potential large and growing physician gap looms over the next decade, with potential for users of health care

80

Growth in Healthcare Profession by Skill Level, 2012 – 2022F

Source: Bureau of Labor Statistics, Insurance Information Institute.

5,00

5

2,89

3

2,49

2

1,77

1

6,02

0

3,59

0

3,24

2

2,19

6

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Practitioners, includingRNs

Technicians, includingLPNs

Aides Other

2012 2022

(Thousands of Jobs)

+1.015 Mill +20.3%

+697,000 +24.1% +750,000

+30.1% +425,000 +24.0%

Workers Compensation Operating Environment

81

The Weak Economy and Soft Market Have Made the Workers Comp Operating

Increasingly Challenging

81

Workers Compensation Combined Ratio: 1994–2014F

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5 10

3.5

104.

5 110.

6 115.

0

115.

0

109.

0

105.

0

104.

0

121.

7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F

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

2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute (2013-14). 82

WC results have improved markedly

since 2012

83

Return on Net Worth, 2003-2012,Workers Comp vs. All P/C Lines

Sources: NAIC, Report on Profitability by Line by State in 2012.

6.9%

10.1% 10.0%9.0%

5.1%4.2% 3.9%

6.2% 5.9%

10.0%

14.4%

12.5%

2.4%

6.3%

8.0%

4.9%5.8%

9.6%

9.5%

5.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

03 04 05 06 07 08 09 10 11 12

US WComp US All P/C Lines(Percent)

WC Has Been Marginally Less Profitable than the P/C Insurance Industry Overall

Average: 2003-2012WC: 7.1%

All P/C Lines: 7.9%

84

Workers Comp Return on Net Worth, 201214

.3

13.0

13.0

12.9

12.2

11.1

10.7

10.6

10.6

9.9

9.9

9.8

9.4

9.1

9.0

8.9

8.7

8.6

8.5

8.4

8.3

8.1

0

2

4

6

8

10

12

14

16

DC

MT* NV* M

I

WV

SD AR AL

TX MA VT AK

NE

ME FL KS

MS

KY

MN HI

TN NH

Sources: NAIC; Insurance Information Institute* Denotes results exclude state funds. Other state funds are included in results

9 states posted double-digit profits

in WC in 2012

Top 25 StatesPercent

85

7.5

6.9

6.7

6.7

6.4

6.4

6.3

6.3

6.2

6.2

5.9

5.3

5.1

5.0

4.4

4.3

4.3

4.3

4.2

3.9

3.9

3.7

3.7

2.0

1.8

1.0

012

3456

78

IN VA OR

SC* IA

MD

* LA UT

MO

PA*

US

GA IL AZ

NC CT RI

WI

NJ

CA

CO

* ID NM NY

OK

*

DE

Sources: NAIC; Insurance Information Institute* Denotes results exclude state funds. Other state funds are included in results.

In 2012, in 7 states the Return on Net Worth was

under 4%

Bottom 25 States

Workers Comp Return on Net Worth, 2012

Percent

Workers Compensation Medical SeverityModerate Increase in 2012

87

Accident Year

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

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

$8.1

$8.2

$8.1

$8.8

$9.2

$9.9

$10.9

$11.8

$13.1

$14.0

$15.9

$17.3

$18.7

$19.7

$21.2

$22.3

$23.7

$25.3

$26.4

$26.7

$27.7

$28.5

+6.8%+1.3%-2.1%+9.0%+5.1%+7.4%

+10.1%+8.3%

+10.6%+7.3%

+13.5%+8.8%

+7.7%+5.4%

+7.8%+5.4%

+6.3%+6.6%

+4.1%+1.4%+3.6%

+3%

5

10

15

20

25

30

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

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

Cumulative Change = 252%(1991-2012p)

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

Accident Year

$9.8

$9.5

$9.2

$9.7

$9.8

$10.4

$11.2

$12.2

$13.5

$14.8

$16.2

$16.7

$17.5

$22.2

$22.4

$22.2

$22.4$18.2

$17.7

$19.2

$20.8

$21.7

+1%-3.0%

+0.7%+8.8% +2.2%

+5.6%+3.1%+1.0%+4.6%+3.1%+9.2%

+10.1%+10.1%

+9.0%+7.7%

+5.9%+1.7%+4.9%-2.8%-3.1%+1.0%

+6.2%

5

7

9

11

13

15

17

19

21

23

25

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

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2011:+3.2%

Accident Year

Workers Comp Indemnity Claim Costs: Small Increase in 2012

Average indemnity costs per claim were up 1% in

2012 to $22,400

Average Indemnity Cost per Lost-Time Claim

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

Workers Compensation Lost-Time Claim Frequency Declined in 2012Lost-Time Claims

89

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p

-10-8-6-4-202468

1012

-4.2 -4.4

-9.2

0.3

-6.5

-4.5

0.5

-3.9-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3-5.7

11

-4-5.0

3.8

-0.9

AdjustedIndicated

Frequency Change: 2007—2012Contracting: 7.97.1 -9.3%

Manufacturing: 13.612.0 -11.8%

Percent

Accident Year*Adjustments primarily due to significant audit activity.2012p: Preliminary based on data valued as of 12/31/20121991–2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policiesFrequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost levelSource: NCCI.

Cumulative Change of –55.4%(1991–2011 adj.)

Workers Compensation Premium: Second Consecutive Year of IncreaseNet Written Premium

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012p

0

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3 25.0 26.1

29.2 31.134.7

37.8 38.6 37.633.8

30.3 29.9 32.335.2

31.0 31.329.8 30.5 29.1

26.328.2 26.9 25.9 25.0

28.632.1

37.7

42.3

46.5 47.8 46.544.3

39.3

34.6 33.836.4

39.6

State Funds ($ B)Private Carriers ($ B)

Pvt. Carrier NWP growth was +9.0% in 2012, the

best since 2005

$ Billions

Calendar Yearp Preliminary

Source: 1990–20102p Private Carriers, Annual Statement Data, NCCI.1996–2012p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

93

Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2012*

27.9

21.7

18.8

12.4

4.0

0.8

0.2

-0.3

-1.1

-1.8

-2.5

-2.7

-3.6

-3.9

-4.7

-5.4

-6.8

-9.1

-9.2

-9.7

-10.

2

-10.

8

-11.

6

-30-25-20-15-10-505

1015202530

OK IA SD NY

KS

CT CA

NE IN WI

NJ MI

MN IL VA PA NH VT US AK

NM TX MD

Pece

nt c

hang

e (%

)

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

94

Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2012*

-12.

1

-12.

9

-14.

3

-15.

4

-15.

5

-15.

9

-16.

0

-16.

6

-16.

9

-17.

8

-18.

3

-19.

9

-20.

8

-21.

9

-24.

6

-25.

5

-26.

0

-27.

4

-31.

8

-33.

9

-35.

1

-38.

3

-43.

4

-49.

1

-60-55-50-45-40-35-30-25-20-15-10

TN DC

MA RI

MS

GA

AR ID LA ME

NC SC AL

MO

MT

CO KY AZ

UT

OR FL HI

DE NV

Pece

nt c

hang

e (%

)

Bottom 25 States

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.

States with the poorest performing economies also produced the most negative net change in premiums of

the past 5 years

97

Change in Commercial Rate Renewals, by Line: 2013:Q3

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

Major Commercial Lines Renewed Uniformly Upward in Q3:2013 for the 9th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

3.5%

4.7%5.4%

5.8%

1.0%

2.9% 2.7% 2.9% 2.9%3.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Sur

ety

Con

stru

ctio

n

Bus

ines

sIn

terru

ptio

n

Um

brel

la

Gen

eral

Liab

ility

Com

mer

cial

Aut

o

Com

mer

cial

Pro

perty D&

O

EP

L

Wor

kers

Com

p

Workers Comp rate increases are large than any other line, followed

by Property lines

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

99

Growth in Direct Written Premium by Line, 2013-2015F*

Source: Conning.

4.4%

4.4%

4.4%

4.1%

5.1% 5.

8%

8.6%

5.6% 6.

2%

4.0% 4.1%

3.9%

3.6%

5.1%

6.1%

8.0%

6.0%

3.7%4.

3%

3.9%

4.7%

3.2%

5.5% 6.

0%

7.5%

7.0%

3.4%

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

10%

All Lines PersonalLines

CommercialLines

PersonalAuto

HomeownersCommercialAuto

WC CMP GL

2013F 2014F 2015F

(Percent) P/C growth is expected to remain fairly stable

through 2015

INVESTMENTS: THE NEW REALITY

103

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

103

Property/Casualty Insurance Industry Investment Income: 2000–2013*1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$47.7$45.8

$39.6

$49.5$52.3

$30

$40

$50

$60

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

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

1 Investment gains consist primarily of interest and stock dividends..*Estimate based on annualized actual 9M:2013 investment income of $34.338B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

109

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*

*Monthly, constant maturity, nominal rates, through February 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Recession2-Yr Yield10-Yr Yield

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

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

U.S. Treasury yields plunged to historic lows in

2013. Only longer-term yields have rebounded.

109

110

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Feb. 2014

0.05% 0.05% 0.08% 0.12% 0.33%

2.15%

2.71%

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

1.40%

0.69%

3.66%3.38%

0%

1%

2%

3%

4%

5%

6%

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

Feb. 2014 Yield CurvePre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level in

at least 45 years. Investment income is falling as a result.

Even as the Fed “tapers” rates are unlikely to return to pre-crisis

levels anytime soon

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Until Unemployment Drops Below 6.5% or Until Inflation Expectations

Exceed 2.5%; Low Rates Add to Pricing Pressure for Insurers.Source: Federal Reserve Board of Governors; Insurance Information Institute.

112

Outlook for U.S. Treasury Bond Yields Through 2015

0.761.17

1.802.30

1.802.35

3.50

4.20

1.40

0.100.090.060.00.51.01.52.02.53.03.54.04.5

2012 2013 2014F 2015F

3-Month 5-Year 10-Year

% Yield

Longer-tail lines like MPL and workers comp will benefit the most from the normalization of yields

Long-term yields should begin to normalize in 2014 but short-term yields will

remain very low until 2015

112Source: Federal Reserve Board of Governors (2012-2013), Swiss Re (2014-2015); Insurance Information Institute.

Financial Strength & Underwriting

113

History Suggests that WC, Like Other Long-Tailed Lines Is Much

More Difficult to Underwrite

113

P/C Insurer Impairments, 1969–201269 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

0

10

20

30

40

50

60

70

815

127

11 934

913 12

199

16 14 1336

4931

3450 48

5560 58

4129

1612

3118 19

49 5047

3518

14 155

1619 21

3421

Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute.

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

114

Impairments among P/C insurers remain infrequent

115

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012

90

95

100

105

110

115

12069 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

Com

bine

d R

atio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Impairm

ent Rate

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

116

Number of Recessions Endured by P/C Insurers, by Number of Years in Operation

32

27

20

13

8

0

5

10

15

20

25

30

35

1-50 51-75 76-100 101-125 126-150

Sources: Insurance Information Institute research from National Bureau of Economic Research data.

Number of Recessions Since 1860

Many US Insurers Are Close to a Century Old or Older

Number of Years in Operation

Insurers are true survivors—not just of natural catastrophes but also economic ones

116

117

Reasons for US P/C Insurer Impairments, 1969–2012

43.4%

12.6%

7.2%

7.1%

8.0%

6.6%

8.4%

3.5% 3.1%

Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute.

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

118

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2012

19.7%

22.2%

9.2%8.8%

7.3%

8.6%

6.7%

4.8%

4.0%

8.6%

Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute..

Medical Professional Liability Accounts for Only About 2% of Industry DPW but 6.7% of Insurer Impairments

Workers Comp

Other

Pvt. Passenger Auto

HomeownersCommercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

Surety

Title

Workers Compensation

119

The NEXT 100 Years

119

121

Workers Compensation Timeline

Industrialization of US in the Late 19th/Early 20th Century Led to Increasing & Unacceptably High Number of Deaths and Injuries Among Workers In 1912, an estimated 18,000 to 23,000 workers were killed on the job (compared to

5,071 in 2008) and approximately 4.7 million (12% or workforce) suffered a nonfatal illness or injury (compared to 3.7 million 2008)

The 1912 death/injury rates would imply 75,600 deaths and 17 million injuries today More awareness of broader impacts on families of injured/killed workers

Workers Could Seek Redress Under Tort Law, But Seldom Prevailed Employers usually won suits filed by injured workers by arguing:

– Contributory Negligence: Employee was at least partially to blame for the accident– Assumed Risk: By taking the job, the employee understood the hazards involved– Fellow Servant Rule: A fellow worker caused the accident, so the employer was not at fault

European Countries Began to Implement Workers Compensation Programs Germany (1884); England (1897)

Insurers Began to Sell Commercial Liability Coverage in the Late 1800s Coverage for inadvertent errors became more commonplace In the workforce, such policies became the first employer liability policies

Source: Insurance Information Institute.

123

Cumulative Number of WC Laws Passed, 1910-1920

1

1013

2224

32 32

37 3842 43

0

5

10

15

20

25

30

35

40

45

1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920

No. of states

Source: http://eh.net/encyclopedia/article/fishback.workers.compensation; Insurance Information Institute.

New York was the first state to pass a WC law in 1910, and Ohio was one of the first ten when its law passed in

1911. By 1920, 43 of the 48 states at that time had passed WC laws

124

Workers Compensation:4 Predictions for the Next 100 Years

1. The Workplace Will Become Safer Continuation of a nearly century long trend Deaths and injuries will continue to fall and perhaps plummet due to improvements in

risk management, technology and medicine Technologies such as autonomous (driverless vehicles) will likely be a reality within 20-

25 years causing motor-vehicle related fatalities and injuries (including MSDs) to fall

2. The Footprint of Federal Regulation on Insurance Will Increase TRIA: Workers comp is arguably the most TRIA-dependent line Post-Dodd-Frank: One (and in the future perhaps more) Systemically Important

Financial Institution (SIFI) is a big WC insurer; The Fed is the ultimate regulator of SIFIs Other WC insurers and reinsurers could be designated as Internationally Active

Insurance Group (IAIG); Impact of this in the US is still unclear; More capital? Federal Insurance Office (FIO): Pushing for greater consistency in state regulation Affordable Care Act and subsequent healthcare legislation Will the federal government take direct interest in WC?

– It already has (e.g., TRIA) but will not seek to completely usurp states– As WC medical loss share rises, WC will get pulled into a tighter federal orbit

Insurers could once again resurrect the Optional Federal Charter debate Bottom Line: The federal regulatory camel’s nose is under the tent; The hump is next.

Source: Insurance Information Institute.

Workplace Fatalities, 1945-2012

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,00045 50 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 12

Fata

litie

s

0

5

10

15

20

25

30

35

Rate per 100,000 W

orkers

Fatalities Rate per 100,000 Workers

Source: Bureau of Labor Statistics; National Safety Council; Insurance Information Institute

Workplace deaths and injury rates have been falling for decades—trends that will likely continue for many years to come

126

U.S. Workforce Injury & Illness Rates, 1973-2012

0.0

4.0

8.0

12.0

16.0

20.0

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

Total

Manufacturing

Construction

Sources: Bureau of Labor Statistics; Insurance Information Institute

Workplace injury rates have declined in all industries from 11.0 in 1973 to 3.4 in 2012; in the same period injury rates in manufacturing declined from 15.3 to 4.3 and in construction from 19.8 to 3.7.

(Injuries and Illnesses per 100 Full-Time Workers)

127

Frequency: 1926–2009A Long-Term Drift Downward

Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research.

Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers

0

5

10

15

20

25

30

'26

'28

'30

'32

'34

'36

'39

'41

'43

'45

'47

'49

'52

'54

'56

'58

'60

'62

'65

'67

'69

'71

'73

'75

'78

'80

'82

'84

'86

'88

'91

'93

'95

'97

'99

'01

'04

'06

'08

'10

129

3. Businesses Will Retain More Risk Large deductible programs, self-insurance and use of captives will grow Driven by more sophisticated risk management throughout corporate America and build-

up of cash on corporate balance sheets (phenomenon of increased risk retention is occurring for most types of property and liability risks)

Some catastrophic WC exposures could be securitized

4. Medical Costs Will Continue to Rise Technology, advancements in medicine will drive costs higher Co-morbidities persist but may plateau; May improve over the span of decades Supply/Demand imbalances for med services unlikely to persist beyond next 20 years Consolidation in the healthcare space is likely; Net impact is upward price pressure Digitization of patient med records per ACA is costly but ultimately should save money BUT: “Big Data” drive should improve patient outcomes and lower costs IF: Population projections are correct, aging will be less of an issue after 2030 or so AND: People will live significantly longer but will not work that much longer

Source: Insurance Information Institute.

Workers Compensation:5 Predictions for the Next 100 Years

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130