Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston...

85
Moving Beyond the Great Recession: Recovery, Uncertainty and Implications for Workers Comp & P/C Insurance Markets National Council on Compensation Insurance Annual Issues Symposium Orlando, FL May 16, 2013 Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

Transcript of Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston...

Page 1: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Moving Beyond the Great Recession:

Recovery, Uncertainty and Implications for Workers Comp & P/C Insurance Markets National Council on Compensation Insurance

Annual Issues Symposium

Orlando, FL

May 16, 2013 Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

Page 2: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

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Presentation Outline

U.S. Economic Overview and Outlook

Summary and Consequences and Predictions for P/C Insurance

Labor Market “Deep Dive”

Labor Force (Non) Participation: Shrinkage Continues

Social Security Disability vs. WC: Which Is Better for Workers?

Economy as a Growth Engine for P/C Insurers

Summary of P/C Financial Performance

Profits and Profitability

Where Will the Market Go From Here?

Underwriting Loss Trends

Capital/Capacity

Reinsurance Markets

Pricing Discipline

Other Contributing Factors to Industry Financial Performance

Investment Environment

Inflation

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Economics 2013:

US Economy is Stabilizing

2013 Will Build on 2012 as Only the Second Year of Solid Grow Since

the Great Recession

Enormous Consequences for P/C Insurers

3

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Economic Outlook for 2013

Economic Growth Remains Modest but Accelerates by late 2013/14

No Recession

Enormous regional differences persist

Economic wounds are increasingly self-inflicted (e.g., Sequestration)

Modest wage and salary growth continue; Hours worked stable

Consumer Confidence Remains Reasonably Strong

Consumer Spending/Investment Will Continue to Expand

Consumer and Business Lending Continue to Expand

Housing Market Continues to Improve

Principal driver of construction activity

Inflation Remains Tame

Less pressure on claims severity

Private Sector Hiring Remains Consistently Positive

Unemployment approaches 7% by year’s end

Fed’s 6.5% unemployment target is hit in mid-2014

Issues in Europe, China Do Not Derail US Recovery

Soft Landing in China

Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End

Stock and Bond Markets More Stable, Less Volatile

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P/C Insurance Exposures Grow Robustly

Personal and commercial exposure growth is certain in 2013; Strongest since 2004

But restoration of destroyed exposure will take until mid-decade

P/C Industry Growth in 2013 Will Be Strongest Since 2004

Growth likely to exceed A.M. Best projection of +4.5% for 2013

Positive pricing trends continue

Underwriting Fundamentals Improve Modestly

Rate, reforms help key lines; Possibility of reduced prior-year loss reserves in some lines

Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures

Wage growth is also positive and could modestly accelerate

WC remains the fastest growing P/C line for 3rd straight year

Increase in Demand for Commercial Insurance Could Strengthen in 2013

Includes workers comp, property, marine, many liability coverages

Industry Capacity Hits a New Records in 2013 (Barring Meg-CAT)

Investment Environment Is/Remains Much More Favorable

Return of realized capital gains as a profit driver

Interest rates remain low; Some upward pressure if economic strength surprises or Fed eases on QE3 program late in 2013

TRIA Debate is Accelerated in the Wake of Boston Marathon Bomb Attacks

Insurance Industry Predictions for 2013

Page 6: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Terrorism Update

6

Boston Marathon Bombings Underscore the Need for

Extension of the Terrorism Risk Insurance Program

6

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Terrorism Risk Insurance Program

Boston Marathon Bombing Should Help Focus Attention in Congress on TRIA

Act expires 12/31/14

Numerous headwinds

Exclusionary Language Will Be Inserted for Renewals Occurring After 1/1/14

Boston Marathon Issues

Property and BI losses not large but could breach $5 mill threshold for certification under TRIPRA

Certification issue is generating press; No deadline to certify

Disincentive to certify?

Few of the impacted business had terror coverage

Longer-term: Litigation issues (e.g., race organizers)

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Labor Market Trends

Labor Market Is Showing Signs of Life

8

Workers Comp Is the Principal Beneficiary of Improving Job Outlook

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Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling

2

4

6

8

10

12

14

16

18

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Jan

13

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.5% in

Apr. 2013—lowest in 4 years.

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

Peak rate in the last 30 years:

10.8% in November -

December 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 13.7%

in Apr. 2013

January 2000 through Apr. 2013, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

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

9

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22

75

41

68

50

12

36

61

-79

24 6

8 74

51

2-1

14

-10

5-2

22

-21

9-2

03

-26

7-2

69

-42

9-4

84

-78

6 -70

1-8

21

-69

2-8

12

-82

1-2

88

-44

2-2

82 -2

22 -1

62

-23

3-3

4-1

67

-17

-26

17

01

02

94 10

31

29

11

3 18

81

54

11

48

02

43

22

33

03

18

31

77

20

61

29

25

61

74

19

7 24

9 32

32

65

20

81

20 15

27

81

77

13

11

18

21

7 25

62

24

16

43

19

15

41

76

11

1(1,000)

(800)

(600)

(400)

(200)

0

200

400

Ja

n-0

7F

eb

-07

Ma

r-0

7A

pr-

07

Ma

y-0

7Ju

n-0

7Ju

l-0

7A

ug

-07

Se

p-0

7O

ct-

07

No

v-0

7D

ec-0

7Ja

n-0

8F

eb

-08

Ma

r-0

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08

Ma

y-0

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l-0

8A

ug

-08

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No

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eb

-09

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Ma

y-0

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ug

-09

Se

p-0

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ct-

09

No

v-0

9D

ec-0

9Ja

n-1

0F

eb

-10

Ma

r-1

0A

pr-

10

Ma

y-1

0Ju

n-1

0Ju

l-1

0A

ug

-10

Se

p-1

0O

ct-

10

No

v-1

0D

ec-1

0Ja

n-1

1F

eb

-11

Ma

r-1

1A

pr-

11

Ma

y-1

1Ju

n-1

1Ju

l-1

1A

ug

-11

Se

p-1

1O

ct-

11

No

v-1

1D

ec-1

1Ja

n-1

2F

eb

-12

Ma

r-1

2A

pr-

12

Ma

y-1

2Ju

n-1

2Ju

l-1

2A

ug

-12

Se

p-1

2O

ct-

12

No

v-1

2D

ec-1

2Ja

n-1

3F

eb

-13

Ma

r-1

3A

pr-

13

Monthly Change in Private Employment

January 2007 through Apr. 2013 (Thousands)

Private Employers Added 6.74 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)

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

176,000 private sector jobs were created in April

YTD 2013: 813,000

10

Jobs Created

2012: 2.247 Mill

2011: 2.420 Mill

2010: 1.235 Mill

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0.0

51

0.0

53

-0.0

61

-0.1

66

-0.3

88

-0.6

07

-0.8

10

-1.0

77

-1.3

46

-1.7

75

-2.2

59

-3.0

45

-3.7

46

-4.5

67

-5.2

59

-6.0

71

-6.8

92

-7.1

80

-7.6

22

-7.9

04

-8.1

26

-8.2

88

-8.5

21

-8.5

55

-8.7

22

-8.7

39

-8.7

65

-8.6

54

-8.4

84

-8.3

82

-8.2

88

-8.1

85

-8.0

56

-7.9

43

-7.7

55

-7.6

01

-7.4

87

-7.4

07

-6.9

41

-6.6

38

-6.4

55

-6.2

78

-6.0

72

-5.9

43

-5.6

87

-5.5

13

-5.3

16

-5.0

67

-4.7

44

-4.4

79

-4.2

71

-4.1

51

-3.9

99

-3.9

21

-3.7

44

-3.6

13

-3.4

95

-3.2

78

-3.0

22

-2.7

98

-2.6

34

-2.3

15

-2.1

61

-1.9

85

-7.1

64

-10

-8

-6

-4

-2

0

2

De

c-0

7Ja

n-0

8F

eb

-08

Ma

r-0

8A

pr-

08

Ma

y-0

8Ju

n-0

8Ju

l-0

8A

ug

-08

Se

p-0

8O

ct-

08

No

v-0

8D

ec-0

8Ja

n-0

9F

eb

-09

Ma

r-0

9A

pr-

09

Ma

y-0

9Ju

n-0

9Ju

l-0

9A

ug

-09

Se

p-0

9O

ct-

09

No

v-0

9D

ec-0

9Ja

n-1

0F

eb

-10

Ma

r-1

0A

pr-

10

Ma

y-1

0Ju

n-1

0Ju

l-1

0A

ug

-10

Se

p-1

0O

ct-

10

No

v-1

0D

ec-1

0Ja

n-1

1F

eb

-11

Ma

r-1

1A

pr-

11

Ma

y-1

1Ju

n-1

1Ju

l-1

1A

ug

-11

Se

p-1

1O

ct-

11

No

v-1

1D

ec-1

1Ja

n-1

2F

eb

-12

Ma

r-1

2A

pr-

12

Ma

y-1

2Ju

n-1

2Ju

l-1

2A

ug

-12

Se

p-1

2O

ct-

12

No

v-1

2D

ec-1

2Ja

n-1

3F

eb

-13

Millio

ns

Cumulative Change in Private Employment: Dec. 2007—Apr. 2013

December 2007 through April 2013 (Millions)

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

Cumulative job losses peaked at 8.765 million

in February 2010

Cumulative job losses as of Apr. 2013 totaled

1.985 million

11

All of the jobs “lost” since President

Obama took office in Jan.

2009 have been recouped

Private Employers Added 6.74 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)

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-0.0

17

-0.0

43

0.0

68

0.2

38

0.3

40

0.4

34

0.5

37

0.6

66

0.7

79

0.9

67

1.1

21

1.2

35

1.3

15

1.5

58

1.7

81

2.0

84

2.2

67

2.4

44

2.6

50

2.7

79

3.0

35

3.2

09

3.4

06

3.6

55

3.9

78

4.2

43

4.4

51

4.5

71

4.7

23

4.8

01

4.9

78

5.1

09

5.2

27

5.4

44

5.7

00

5.9

24

6.0

88

6.4

07

6.7

39

6.5

61

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-

11

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Feb-1

3

Mar-

13

Millio

ns

Cumulative Change in Private Sector Employment: Jan. 2010—Apr. 2013

January 2010 through April 2013* (Millions)

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

Cumulative job gains through Apr. 2013

totaled 6.74 million

12

Job gains and pay

increases have added more

than $600 billion to payrolls

since Jan. 2010

Private Employers Added 6.74 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)

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-10

33 9

2

511

287

98

-68

-224

-184

-194

-213

-224

-271

-289

-288

-356

-324

-452

-449

-480

-488

-511

-530

-542

-536

-539

-547

-574

-565

-589

-555

-535

-592

-601

-606

-622

-609

-636

-625

-800

-600

-400

-200

0

200

400

600

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-

11

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Feb-1

3

Mar-

13

Cumulative Change in Government Employment: Jan. 2010—Apr. 2013

January 2010 through Apr. 2013* (Millions)

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

Cumulative job losses through Apr. 2013 totaled 636,000

13

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

6.74 million jobs, though

losses may now be ending.

Temporary Census hiring distorted 2010

figures

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

-636

-480

-98-58

-700

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 480,000 from Jan.

2010 through Apr. 2013, accounting for 65% 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 while

Federal employment is down by 2.1%

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Unemployment Rates by State, March 2013: Highest 25 States*

9.7

9.5

9.4

9.4

9.2

9.1

9.0

8.7

8.5

8.5

8.4

8.4

8.2

8.2

8.0

8.0

7.9

7.9

7.9

7.5

7.3

7.3

7.2

7.2

7.1

0

2

4

6

8

10

12

NV IL CA MS NC RI NJ IN DC MI GA SC NY OR CT KY AZ PA TN FL DE WA AL AR CO

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for March 2013, seasonally adjusted.

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

In March, 26 states and the District of Columbia had over-the-month

unemployment rate decreases, 7 states had increases, and 17 states had no

change.

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7.1

7.1

7.1

7.0

6.9

6.7

6.6

6.4

6.4

6.2

6.2

6.2

5.7

5.6

5.6

5.4

5.3

5.1

5.0

4.9

4.9

4.9

4.3

4.1

3.8

3.3

0

2

4

6

8

ME OH WI WV NM MO MD MA TX AK ID LA NH KS MT MN VA HI OK IA UT WY SD VT NE ND

Un

em

plo

ym

en

t R

ate

(%

)

Unemployment Rates by State, March 2013:

Lowest 25 States*

*Provisional figures for March 2013, seasonally adjusted.

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

In March, 26 states and the District of Columbia had over-the-month

unemployment rate decreases, 7 states had increases, and 17 states had no

change.

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US Unemployment Rate Forecast

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

%

6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.6

%

9.6

%

8.9

%

9.1

%

9.1

%

8.7

%

8.3

%

8.2

%

8.0

%

7.8

%

7.7

%

7.6

%

7.5

%

7.4

%

7.3

%

7.2

%

7.1

%6

.9%

9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

Rising unemployment

eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10%

in late 2009.

* = actual; = forecasts

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/13 edition); Insurance Information Institute.

2007:Q1 to 2014:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 6.6% by Q4 of next year.

Jobless figures have been revised

slightly downwards for 2013/14

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Nonfarm Payroll (Wages and Salaries): Quarterly, 2005–2013:Q1

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

$7,2500

5:Q

1

05

:Q2

05

:Q3

05

:Q4

06

:Q1

06

:Q2

06

:Q3

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

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2013:Q4) was $7.01 trillion, a new peak--$762B

above 2009 trough

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

5.3% from prior peak

Payrolls are 12.2% above

their 2009 trough and up 2.7% over

the past year

18

Page 19: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

19

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2012

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2012 actuals.

Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Increases Pushed WC NWP Up by 9.0% in 2012 and 8.0% in 2011 (First Gain Since 2005)

7/90-3/91 3/01-11/01 12/07-6/09

$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

+9% in 2012

Page 20: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

20

POSITIVE LABOR MARKET DEVELOPMENTS

Key Factors Driving Workers

Compensation Exposure

20

Page 21: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

21

Mass Layoff Announcements, Jan. 2002—March 2013*

*Seasonally adjusted.

Note: Recessions indicated by gray shaded columns.

Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

500

1,000

1,500

2,000

2,500

3,000

3,500

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Mass layoff announcements peaked at more than 3,000 per

month in Feb. 2009

There were 1,337 mass layoffs

announced in March 2013, similar to pre-

crisis levels

Page 22: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

22

Average Weekly Hours of All Private Workers, Mar. 2006—Apr. 2013

*Seasonally adjusted

Note: Recessions indicated by gray shaded columns.

Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

33.5

33.6

33.7

33.8

33.9

34.0

34.1

34.2

34.3

34.4

34.5

34.6

34.7

34.8

'06 '07 '08 '09 '10 '11 '12 '13

Hours worked totaled 34.4 per week in April,

just shy of the 34.6 hours typically worked

before the “Great Recession”

Hours worked plunged during the recession,

impacting payroll exposures

(Hours Worked)

Page 23: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

23

Average Hourly Wage of All Private Workers, Mar. 2006—Apr. 2013

*Seasonally adjusted

Note: Recessions indicated by gray shaded columns.

Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

$18.00

$19.00

$20.00

$21.00

$22.00

$23.00

$24.00

$25.00

'06 '07 '08 '09 '10 '11 '12 '13

The average hourly wage was $23.87 in Apr. 2013,

up 12.3% from $21.25 when the recession began in Dec. 2007

Wage gains continued during the

recession, despite massive job losses

(Hourly Wage)

Page 24: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

24

Oil & Gas Extraction Employment, Jan. 2010—April 2013*

*Seasonally adjusted

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

15

6.4

15

6.4

15

6.7

15

7.6

15

8.7

15

7.8

15

8.0

15

9.5

16

0.0

16

1.5

16

1.2

16

1.2

16

3.1

16

4.4

16

6.6 16

9.3

17

0.1

17

1.0

17

2.5

17

3.6 17

6.3

17

8.2

17

8.5

18

0.9

18

1.9

18

3.1

18

4.8

18

5.2

18

5.7

18

6.8

18

7.6

18

8.0

18

8.0

18

8.2

19

0.0

19

1.7

19

1.9

19

3.1

19

2.5

19

2.5

150

155

160

165

170

175

180

185

190

195

200

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

2/3

0/2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

De

c-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Oil and gas extraction employment is up 23.1% since Jan. 2010 as the energy sector booms.

Domestic energy production is essential to

any robust economic recovery in the US.

(Thousands)

Page 25: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

25

Manufacturing Employment, Jan. 2010—April 2013*

11

,46

0

11

,46

0

11

,46

6

11

,49

7

11

,53

1

11

,53

9

11

,55

8

11

,54

8

11

,55

4

11

,55

5

11

,57

7

11

,59

0

11

,62

4

11

,66

2

11

,68

2

11

,70

7

11

,71

5

11

,72

4

11

,74

7

11

,76

0

11

,76

2

11

,77

0

11

,76

9

11

,79

7

11

,84

1

11

,87

0

11

,91

0

11

,92

0

11

,92

6

11

,93

5

11

,95

7

11

,94

3

11

,92

5

11

,93

1

11

,93

8

11

,95

1

11

,96

5

11

,98

8

11

,99

0

11

,99

0

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

2/3

0/2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

De

c-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

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

in the economy. Employment in the sector is close to a multi-year high.

*Seasonally adjusted

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

(Thousands)

Page 26: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

26

ADVERSE LONG-TERM

LABOR MARKET DEVELOPMENTS

Key Factors Harming Workers

Compensation Exposure and the

Overall Economy

26

Page 27: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

27

Labor Force Participation Rate, Jan. 2002—Apr. 2013*

*Defined as the percentage of working age persons in the population who are employed or actively seeking work.

Note: Recessions indicated by gray shaded columns.

Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

62

63

64

65

66

67

68

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

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

labor force)

Labor force participation

continues to shrink despite a falling

unemployment rate

Labor Force Participation as a % of Population

Page 28: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

28

Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.

Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Ins. Info. Inst.

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

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

In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).

There were 835,000

discouraged workers in Apr. 2013

Thousands

“Discouraged Workers” are

people who have searched

for work for so long in vain

that they actually stop

searching and drop out of

the labor force

Number of “Discouraged Workers,” Jan. 2002—April 2013

Large numbers of people are exiting

(or not returning to) the labor force

Page 29: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

29

Change in Number of Discouraged Workers: Apr. 2012 vs. Apr. 2013

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

-13.7%

-18.3%

-11.5%

-14.0%

-18.8%

-5.0%

-20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Overall 16 to 24 25 to 54 55+ Men Women

Young workers are becoming less

discouraged faster than older workers

(Percent Change)

AGE GENDER

The number of discouraged

workers fell by 133,000 over the

past year to 835,000, a

decline of 13.7% Men are less discouraged

about their job prospects

Page 30: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

30

Discouraged Workers by Gender (as of April 2013)

41%

59%

Source: Bureau of Labor Statistics: at http://www.bls.gov/web/empsit/cpseea38.htm; Insurance Information Institute.

The overwhelming of discouraged workers are male, for a variety of reasons

Female = 339,000 Male = 496,000

Reasons for Lower Female

Discouragement Rate

•Less likely to work in

heavily impacted industries

such as construction

•More likely to retrain

•More likely to retrain quickly

•Better educated

TOTAL = 835,000

Page 31: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Social Security Disability: Explosive Growth

31

Growth in this System Is Harming the

Economy, Contributing to Fiscal Imbalances

Could Learn a Thing or Two from WC

Page 32: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Number of Social Security Disability Income Recipients, 1990-2015P*

7.4

3

7.7

9 8.2

0

8.5

8

8.8

6 9.4

0

4.8

7

4.6

9

4.5

0

4.3

8

4.1

8

3.0

1

5.0

4

5.2

7

5.5

4

5.8

7

6.2

0

6.5

2

6.8

1

7.1

0

2.5

5.0

7.5

10.0

19

90

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

P

20

15

P

*End of year. Does not include children or widows.

Source: Social Security Trustees Report, 2012, p. 131

Millions of Recipients

Growth in the Number SSDI Recipients is Growing Rapidly Pace and Seems Impervious to Improvements in the Labor Market—Both Are

Suggestive of Fraud and Abuse.

Between 1995 and 2012, the number of workers claiming disability increased by 112%

while the number of workers in the US overall increased by just

13.9% - an 8 fold difference

Page 33: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Percent of the Civilian Non-Institutional Population that Received SS Disability Income, 1995-2011

3.4

5%

3.5

8%

2.4

5%

2.3

7%

2.3

4%

2.2

9%

2.2

2%

2.1

8%

2.1

0%

2.5

5%

2.6

5%

2.7

7%

2.8

8%

2.9

7%

3.0

6%

3.1

8%

3.3

0%

2.0%

2.5%

3.0%

3.5%

4.0%1

99

5

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Sources: Social Security Trustees Report, 2012, p. 131; U.S. Bureau of Labor Statistics; I.I.I.

The Share of the Population Receiving SSDI Benefits Has Increased Dramatically

Page 34: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Number* Receiving SS Disability Income, 1990-2012

0

1

2

3

4

5

19

67

19

68

19

69

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Men WomenMillions

As More Women Worked Long Enough to Become SSDI Eligible, More Qualified for SSDI When They Became Totally Disabled.

At year-end1979 there were 1 million more male SSDI recipients than

female recipients. By year-end 2012 the gap was 375,000 (4.60 million

men vs. 4.22 million women).

*End of year. Does not include children or widows.

Source: Social Security Trustees Report, 2012, p. 131

The number of women claiming SSDI now rivals

that of men

Page 35: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Disability Prevalence Rates (Age-Sex-Adjusted), 1995-2012P

4445

46

373736363636

35

3839 39

40 4041 41

43

30

35

40

45

50

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012P

*The Disability Prevalence Rate is the number of disabled-worker beneficiaries as a percentage of the number insured for SSDI benefits.

Sources: Social Security Trustees Report, 2012, p. 131 and 133.

Reasons for Increasing Disability Prevalence Rate:

-Termination rates have declined

-Incidence rate at younger ages increased relative to older ages

-Incidence rates for women increased sharply compared with men

Rate per thousand

persons insured

Page 36: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

36

Workers Compensation Does a Much Better

Job of Returning People to Work/Life than SSDI

-4.5

0.5

-3.9

-2.3

-4.5

-6.9

-4.5-4.1

-3.7

-6.6

-2.2

-4.3

-5.7

3.8

-0.9

2.9

0.0 0.0 0.0

2.8

0.0

2.7 2.6

0.0

2.6

0.0

2.5

0.0

4.9

2.3 2.3 2.2

-5-4.5

-8

-6

-4

-2

0

2

4

6

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

Change in WC Claim FrequencyChange in SSDI Claim Prevalence

Change in Claim Frequency

Since 1996, WC lost-time claim frequency is down by more than 50% while SSDI claim frequency is up nearly 30%

*Workers comp data are for lost-time claims only.

Sources: Insurance Information Institute from Social Security Trustees Report, 2012, p. 131; NCCI.

Page 37: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

37

Growth Will Expand Insurer Exposure

Base Across Most Lines

37

Page 38: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

38

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.

Source: US Department of Commerce, Blue Economic Indicators 5/13; 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%

2.5

%1

.7%

2.3

%2

.6%

2.7

%2

.8%

2.9

%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%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

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

was severe

The Q4:2008 decline was the steepest since the Q1:1982

drop of 6.8%

2013 is expected to see uneven growth, then gradually accelerate throughout the year

and into 2014

Page 39: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Federal Spending as a Share of State GDP: Vulnerability to Sequestration Varies

Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute. 39

NY has relatively little exposure to sequester cuts

Page 40: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

74

.47

3.6

73

.67

2.2

73

.6 76

67

.86

8.9

68

.26

7.7 7

1.6 74

.57

4.2 7

7.5

67

.5 69

.8 74

.37

1.5

63

.75

5.7 5

9.5

60

.9 64

.16

9.9

75

.07

5.3

76

.27

6.4 79

.37

3.2

72

.3 74

.38

2.6

82

.77

4.5

73

.8 77

.67

8.6

72

.3

40

45

50

55

60

65

70

75

80

85

90

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Oct-

12

No

v-1

2

De

c-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Consumer Sentiment Survey (1966 = 100)

January 2010 through April 2013

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact

consumers, but improved substantially in late 2011 and in 2012

Source: University of Michigan; Insurance Information Institute

Optimism among consumers has remained fairly strong despite tax

hike, federal budget concerns until April

40

Page 41: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

41

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

8

1.0

2

1.2

3 1.3

5

1.4

4

1.5

0

1.5

1

1.5

0

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/13 and 3/13); Insurance Information Institute.

Homeowners Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005. Commercial Insurers with Construction Risk

Exposure, Surety; 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 are stimulating new home construction

for the first time in years

Page 42: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

42

Construction Employment, Jan. 2010—April 2013*

*Seasonally adjusted

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

5,5

81

5,5

22

5,5

42

5,5

54

5,5

27

5,5

12

5,4

97

5,5

19

5,4

99

5,5

01

5,4

97

5,4

68

5,4

35 5

,47

8

5,4

85

5,4

97

5,5

24

5,5

30

5,5

47

5,5

46 5,5

83

5,5

76

5,5

77 5,6

12

5,6

29

5,6

44

5,6

40

5,6

36

5,6

15

5,6

22

5,6

27

5,6

30

5,6

33

5,6

49

5,6

73 5,7

11

5,7

35 5

,78

3

5,7

96

5,7

90

5,400

5,450

5,500

5,550

5,600

5,650

5,700

5,750

5,800

5,850

5,900

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

2/3

0/2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

De

c-1

2

Ja

n-1

3

2/3

0/2

Ma

r-1

3

Ap

r-1

3

Construction employment growth accelerated in the second half of 2012. Stronger growth in this key

sector is possible in 2013. Construction is a key driver of

workers comp exposure growth.

(Thousands)

Page 43: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

43

Construction Employment, Jan. 2003–Apr. 2013

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

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

The Construction Sector Could Be a Growth Leader in 2013 and 2014 as the Housing Market and Private Investment 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

43

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction

employment as of Apr. 2013 totaled 5.79 million, an increase of 355,000 jobs or 6.5% from the Jan.

2011 trough

Page 44: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

44

Value of Construction Put in Place, March 2013 vs. March 2012*

-5.4%

-0.2%

-5.5%

4.8%

9.8%

17.8%

-1.2%

-10%

-5%

0%

5%

10%

15%

20%

Total

Construction

Total Private

Construction

Residential--

Private

Non-

Residential--

Private

Total Public

Construction

Residential-

Public

Non-

Residential--

Public

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

Growth (%)

Private sector construction activity is up in the

residential segment but down in nonresidential

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

Private: +9.8% Public: -5.4%

Public sector construction activity remains depressed

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45

Value of Private Construction Put in Place, by Segment, Mar. 2013 vs. Mar. 2012*

-0.1%

-2.1%

-6.8%-4.3%

19.1%

-4.2%

4.3% 3.4%

-12.9%

9.8%

17.8%

-1.2%

11.6%

2.9%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

To

tal

Pri

vate

Co

nstr

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Lo

dg

ing

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Reli

gio

us

Am

usem

en

t &

Rec.

Tra

nsp

ort

ati

on

Co

mm

un

icati

on

Po

wer

Man

ufa

ctu

rin

g

Private Construction Activity is Up Some Segments, Including the Key Residential Construction Sector, But Weakening in Early 2013

Growth (%) Led by the Residential Construction, Lodging, Office, and Transportation industries, Private sector construction activity is mixed up across many segments after plunging during the “Great Recession.” Most segments

expanded in 2012 but weakened in Q1:2013.

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

Page 46: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

46

Value of Public Construction Put in Place, by Segment, Mar. 2013 vs. Mar. 2012*

-4.8%-7.7%

-14.7%-12.4%

21.6%

-5.0%

-18.0%

-5.3%-9.3%

28.6%

-5.4%-0.2%

-5.5%

-29.0%

-14.9%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

To

tal

Pu

bli

c

Co

nstr

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Pu

bli

c S

afe

ty

Am

usem

en

t &

Rec.

Tra

nsp

ort

ati

on

Po

wer

Hig

hw

ay &

Str

eet

Sew

ag

e &

Waste

Dis

po

sal

Wate

r S

up

ply

Co

nserv

ati

on

&

Develo

p.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2013.

Growth (%)

*seasonally adjusted Source: 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

Transportation and Power projects lead

public sector construction

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58

.35

7.1

60

.45

9.6

57

.85

5.3

55

.15

5.2

55

.3 56

.9 58

.25

8.5 6

0.8

61

.45

9.7

59

.75

4.2 5

5.8

51

.4 52

.55

2.5

51

.85

2.2 53

.1 54

.15

1.9 53

.35

4.1

52

.55

0.2

50

.55

0.7

51

.65

1.7

49

.95

0.2

53

.1 54

.2

50

.75

1.3

40

45

50

55

60

65

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

De

c-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

ISM Manufacturing Index (Values > 50 Indicate Expansion)

January 2010 through April 2013

The manufacturing sector expanded for 39 of the 40 months from Jan. 2010 through Apr. 2013. The expectation is that this will continue.

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

Manufacturing activity continues to expand, albeit modestly

47

Page 48: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

48

$200,000

$300,000

$400,000

$500,000

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

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

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

Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to Mar. 2013 was 30%. Manufacturing is an

energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages

The value of Manufacturing Shipments in Mar. 2013 were up 30% to $481.8B from its May 2009 trough. March figure is now 0.7% below its previous record high in July 2008.

$ Millions

48

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50

.7 52

.7 54

.15

4.6

54

.85

3.5

53

.75

2.8 53

.95

4.6 56 5

7.1 5

9.4

59

.75

6.3

54

.45

3.3

53

.45

3.8

52

.65

2.6

52

.65

2.6

53

.05

6.8

56

.15

5.0

53

.75

4.1

52

.75

2.9 54

.3 55

.25

4.8

54

.85

5.7

55

.25

6.0

53

.154

.4

40

45

50

55

60

65

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

De

c-1

2

Ja

n-1

3

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

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

January 2010 through April 2013

Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.

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

Optimism among non-manufacturers is stable

and remains expansionary in 2013

49

Page 50: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

50

43

,69

4

48

,12

5

69

,30

0

62

,43

6

64

,00

4

71

,27

7

81

,23

5

82

,44

6

63

,85

3

63

,23

5

64

,85

3

71

,54

9

70

,64

3

62

,30

4

52

,37

4

51

,95

9

53

,54

9

54

,02

7

44

,36

7

37

,88

4

35

,47

2

40

,09

9

38

,54

0

35

,03

7

34

,31

7

39

,20

1

19

,69

5

28

,32

2 43

,54

6

60

,83

7

56

,28

2

47

,80

6

30

,62

0

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

:Q3

Business Bankruptcy Filings, 1980-2012:Q3

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute

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

2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more

than tripled during the financial crisis. Through Q3:2012, filings were down 15.8% vs. Q3:2011

% Change Surrounding Recessions

1980-82 58.6%

1980-87 88.7%

1990-91 10.3%

2000-01 13.0%

2006-09 208.9%*

50

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51

Private Sector Business Starts, 1993:Q2 – 2012:Q3*

17

51

86

17

41

80

18

61

92

18

81

87

18

91

86 1

90 1

94

19

11

99 2

04

20

21

95

19

61

96

20

62

06

20

11

92

19

82

06

20

62

03

21

12

05

21

22

00 2

05

20

42

04

19

72

03

20

92

01

19

21

92

19

32

01 20

42

02

21

02

12

20

92

16 2

20 22

32

20

22

02

10

22

12

12

20

42

18

20

92

07

20

71

99

19

11

93

17

2 17

61

69

18

41

75 1

79

18

82

00

18

3 18

7 19

11

97

19

31

91

19

3

20

3

150

160

170

180

190

200

210

220

230

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

Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But

Are Recovering Slowly * Data through Sep. 30, 2012 are the latest available as of May 13, 2013; Seasonally adjusted.

Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up an estimated 2.8% in 2012 to 769,000 following a 2.2% to 748,000 in 2011. Start-ups

could accelerate in 2013.

Business Starts 2006: 872,000 2007: 843,000 2008: 790,000 2009: 697,000 2010: 742,000 2011: 748,000 2012E: 769,000*

51

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52

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)

Page 53: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

53

P/C Insurance Industry Financial Overview

Profit Recovery in 2012 After High CAT Losses; Ultimate

Impact of Sandy Still Unclear

53

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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

2005 ROE*= 9.6%

2006 ROE = 12.7%

2007 ROE = 10.9%

2008 ROE = 0.1%

2009 ROE = 5.0%

2010 ROE = 6.6%

2011 ROAS1 = 3.5%

2012 ROAS1 = 5.9%

P-C Industry 2012:Q3 profits were up 222% from 2011:Q3, due primarily to lower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

Sources: A.M. Best, ISO, Insurance Information Institute

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

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%.

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

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0102.4

106.5

95.7

6.2%4.7%

7.9%7.4%

4.3%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012

0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Catastrophes and lower investment

income pulled down ROE in 2012

Page 56: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

-5%

0%

5%

10%

15%

20%

25%

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

F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013F*

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2013 exclude

mortgage and financial guaranty insurers. 2012:Q3 ROAS = 6.2% including M&FG.

Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%

2006:12.7%

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

9 Years

2012:

5.9%

History suggests next ROE

peak will be in 2016-2017

ROE

1975: 2.4%

2013F: 6.2%

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57

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.6

$3

5.0

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

US Insured Catastrophe Losses

Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)

Sources: Property Claims Service/ISO; Insurance Information Institute.

2012 Was the 3rd Highest Year on Record for Insured Losses in US History on An Inflation-Adjusted Basis.

2011 Losses Were the 6th Highest.

2012 was likely the third most expensive year ever for insured

CAT losses

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2012 Dollars)

57

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58

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.

Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

0.4

1.2

0.4 0

.8 1.3

0.3 0.4 0.7

1.5

1.0

0.4

0.4 0.7

1.8

1.1

0.6

1.42

.01

.32

.00

.50

.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7

9.4

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

E

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

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20*

Combined Ratio Points Catastrophe losses as a share of all losses reached

a record high in 2012

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The BIG Question: Where Is the Market Heading?

59

Catastrophes and Other Factors Are Pressuring Insurance Markets

59

New Factor: Record Low Interest Rates Are Contributing to

Underwriting and Pricing Pressures

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UNDERWRITING

60

Underwriting Results in 2012 Improved Despite High

Catastrophe Losses

WC Was One Reason Why 60

Page 61: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

61

P/C Insurance Industry Combined Ratio, 2001–2012*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2.

Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4101.0

92.6

100.8

98.4100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Best Combined Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses Before Sandy

Page 62: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Underwriting Gain (Loss) 1975–2012*

* Includes mortgage and financial guaranty insurers in all years.

Sources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 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

Cumulative underwriting deficit from 1975 through

2012 is $510B

($ Billions) Underwriting

losses in 2012 totaled

$16.7B

High cat losses in 2011 led to the highest

underwriting loss since 2002

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63

2

(2)

(8)

(3)

(7)

(10) (10)

(4)

(0)

11

24

15

119

(5)

(9)

(14)

(10) (11)

(7)(5)

(2)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

E

12

F

13

F

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2013F

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

Further Diminish in 2012 and 2103

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: Barclays Capital; A.M. Best.

Prior year reserve releases totaled $8.8

billion in the first half of 2010, up from

$7.1 billion in the first half of 2009

Page 64: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

10

9.4

11

0.2

11

8.8

10

9.5 1

12

.5

11

0.2

10

7.6

10

4.1

10

9.7

11

0.2

10

2.5 1

05

.4

91

.1

93

.6

10

4.2

98

.9

10

2.1

10

6.7

10

4.9

10

2.1

10

1.4

10

1.3

10

2.0

11

1.1

11

2.3

12

2.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

F

14

F

15

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.

Source: A.M. Best (1990-2011); Conning (2012-2015F) Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

64

Page 65: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

Workers Compensation Combined Ratio: 1994–2012P

10

2.0

97

.0 10

0.0

10

1.0

11

2.6

10

8.6

10

5.1

10

2.7

98

.5

10

3.5

10

4.5 1

10

.6 11

6.8

11

5.0

10

9.0

12

1.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

130

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

Workers Comp Results Began to Improve in 2011-2012. Underwriting Results Deteriorated Markedly from 2007-2010 and Were the Worst They Had Been in a Decade.

Sources: A.M. Best (1994-2010); NCCI (2011-2012P); Insurance Information Institute.

65

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SURPLUS/CAPITAL/CAPACITY

66

How Will Large Catastrophe Losses Impact Capacity?

66

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67

Policyholder Surplus, 2006:Q4–2012:Q4

Sources: ISO, A.M .Best.

($ Billions)

$487.1

$496.6

$512.8

$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7

$530.5

$544.8

$559.2 $559.1

$538.6

$550.3

$567.8

$583.5$586.9

$570.7$566.5

$505.0

$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

06:Q407:Q107:Q207:Q307:Q408:Q108:Q208:Q308:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q4

2007:Q3 Pre-Crisis Peak

Surplus as of 12/31/12 was up $16.2B or 2.8% from the

previous record high of $570.7B set as of 3/31/12.

*Includes $22.5B of paid-in capital

from a holding company parent for

one insurer’s investment in a non-

insurance business in early 2010.

The Industry now has $1 of surplus for every $0.80

of NPW, close to the strongest claims-paying

status in its history.

Drop due to near-record 2011 CAT losses

The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane

Season Very Strong Financially.

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4. RENEWED PRICING DISCIPLINE

68

Evidence of a Broad and Sustained Shift in Pricing

68

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69

-5%

0%

5%

10%

15%

20%

25%

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Net Premium Growth: Annual Change, 1971—2012

(Percent)

1975-78 1984-87 2000-03

Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

2012 growth

was +4.3%

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70

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

Sources: ISO, Insurance Information Institute.

Sustained Growth in Written Premiums (vs. the same quarter, prior year) Will Continue through 2013

10

.2%

15

.1%

16

.8%

16

.7%

12

.5%

10

.1%

9.7

%7

.8%

7.2

%5

.6%

2.9

% 5.5

%-4

.6%

-4.1

%-5

.8%

-1.6

%1

0.3

%1

0.2

% 13

.4%

6.6

%-1

.6%

2.1

%0

.0%

-1.9

%0

.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3

%2

.3%

1.7

% 3.5

%1

.6% 4

.1%

3.8

%3

.1%

4.2

%5

.1%

4.8

%

-10%

-5%

0%

5%

10%

15%

20%

2002:Q

1

2002:Q

2

2002:Q

3

2002:Q

4

2003:Q

1

2003:Q

2

2003:Q

3

2003:Q

4

2004:Q

1

2004:Q

2

2004:Q

3

2004:Q

4

2005:Q

1

2005:Q

2

2005:Q

3

2005:Q

4

2006:Q

1

2006:Q

2

2006:Q

3

2006:Q

4

2007:Q

1

2007:Q

2

2007:Q

3

2007:Q

4

2008:Q

1

2008:Q

2

2008:Q

3

2008:Q

4

2009:Q

1

2009:Q

2

2009:Q

3

2009:Q

4

2010:Q

1

2010:Q

2

2010:Q

3

2010:Q

4

2011:Q

1

2011:Q

2

2011:Q

3

2011:Q

4

2012:Q

1

2012:Q

2

2012:Q

3

2012:Q

4

Premium growth in Q3 2012 was up 5.1% over Q3 2011, the strongest growth since Q4 2006

Page 71: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

71

Direct Premiums Written: Total P/C Percent Change by State, 2007-2012*

58

.4

25

.4

24

.5

21

.0

19

.2

17

.6

16

.3

13

.2

13

.2

12

.4

9.9

9.2

9.2

8.5

8.0

6.2

5.8

5.2

4.5

4.4

4.3

4.3

4.2

4.0

3.8

3.6

0

10

20

30

40

50

60

70

ND

SD

OK

NE IA

KS

VT

AK

TX

WY

MN

AR

TN IN W

I

KY

MT

OH LA

VA

NJ

MI

SC

CO

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

*Data are preliminary as of 5/1/13 and do not yet fully reflect the impact of state-run pools and plans.

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Page 72: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

72

Direct Premiums Written: Total P/C Percent Change by State, 2007-2012*

3.6

3.1

3.0

2.9

2.7

2.2

2.1

2.1

2.0

1.8

1.1

0.0

-0.1

-0.3

-0.7

-0.9

-2.8

-5.6

-6.0

-7.2

-7.2

-9.3

-10

.1

-11

.2

-12

.5

-17

.3

-20

-15

-10

-5

0

5

CT

MS

NC AL

MD

PA

U.S

.

MA IL

WA

GA

UT

NH RI

ID

ME

NY

FL

CA

DC

WV HI

AZ

OR

DE

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

*Data are preliminary as of 5/1/13 and do not yet fully reflect the impact of state-run pools and plans.

Sources: SNL Financial LC.; Insurance Information Institute.

Page 73: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

73

Average Commercial Rate Change, All Lines, (1Q:2004–1Q:2013)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%4

.3%

3.9

%5

.0%

5.2

%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Pricing as of Q1:2013 was positive for the 8th consecutive

quarter. Gains are likely to continue through 2013.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

Page 74: Moving Beyond the Great Recession - III | We are the ... · Presentation Outline ... Boston Marathon Bombings Underscore the Need for Extension of the Terrorism Risk Insurance Program

74

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q1

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Percentage Change (%)

Pricing turned positive in Q3:2011, the first increase in

nearly 8 years; Q1:2013 renewals were up 5.2%, the largest increase since late

2003; Some insurers posted stronger numbers.

KRW : No Lasting Impact

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

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75

Cumulative Qtrly. Commercial Rate Changes, by Line: 1999:Q4 to 2013:Q1

1999:Q4 = 100

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

WC rate levels are rising and are now back to where they were in late 2008 and shortly after 9/11

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76

Change in Commercial Rate Renewals, by Line: 2013:Q1

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

Major Commercial Lines Renewed Uniformly Upward in Q1:2013 for the 8th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

5.5% 5.8%6.8%

9.8%

1.3%

4.1% 4.3% 4.6% 4.6%5.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Su

rety

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

Co

mm

erc

ial

Au

to

Co

nstr

uctio

n

D&

O

EP

L

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rs

Co

mp

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.

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Workers Comp Rate Changes, 2008:Q4 – 2013:Q1

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

-5.5%-4.6%

-4.0%-4.6%

-3.7%-3.9%

-5.4%

-3.7%-3.4%

-1.6%

2.6%

4.1%

7.5%7.4%8.3%8.1%

9.0%9.8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

08:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q413:Q1

WC rate changes have been positive for 7

consecutive quarters, longer than any other

commercial line

(Percent Change)

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

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INVESTMENTS: THE NEW REALITY

78

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

78

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Property/Casualty Insurance Industry Investment Income: 2000–20121

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$47.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

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

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

1 Investment gains consist primarily of interest and stock dividends.. Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings in 2012 were running 13% below their 2007 pre-crisis peak

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U.S. 10-Year Treasury Note Yields: A Long Downward Trend, 1990–2013*

*Monthly, through Apr. 2013. Note: Recessions indicated by gray shaded columns.

Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

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.

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

plunged to all time record lows

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Average Maturity of Bonds Held by US P/C Insurers, 2006—2011*

6.456.53

6.89

7.307.46

7.32

5.0

5.5

6.0

6.5

7.0

7.5

8.0

2006 2007 2008 2009 2010 2011

*Year-end figures. Latest available.

Sources: Insurance Information Institute calculations based on A.M. Best data.

Average Maturity (Years)

Falling Average Maturity (and Duration) of the P/C Industry’s Bond Portfolio is Contributing to the Drop in Investment

Income Along With Lower Yields

The average bond maturity is down by a full year between

2007 and 2011

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82

Distribution of Bond Maturities, P/C Insurance Industry, 2006-2011

16.2%

16.3%

15.2%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%

16.0%

15.7%

15.2%

0% 20% 40% 60% 80% 100%

2006

2007

2008

2009

2010

2011

Under 1 year

1-5 years

5-10 years

10-20 years

over 20 years

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

The main shift over these 6 years has been from bonds with 5-10 years of maturity to bonds with 1-5 years of maturity. The industry also slightly

trimmed it holdings of bonds in the 10-20-year maturity category and bonds in the longest-maturity category.

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83

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Per

sona

l Lin

es

Pvt P

ass

Aut

o

Per

s Pro

p

Com

mer

cial

Com

ml A

uto

Cre

dit

Com

m P

rop

Com

m C

as

Fidel

ity/S

uret

y

War

rant

y

Sur

plus

Lin

es

Med

Mal

WC

Rei

nsur

ance

**

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

*Based on 2008 Invested Assets and Earned Premiums

**US domestic reinsurance only

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

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

83

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84

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

2.82.6

1.51.9

3.3 3.4

1.3

2.52.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.11.7

2.0

2.9

2.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 5/13 (forecasts).

The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and

commodity prices, plus U.S. debt burden, remain longer-run concerns

Annual Inflation Rates (%)

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

commodity bubble reduced inflationary pressures in 2009/10

Inflationary expectations remain quite

low, allowing the Fed to continue its QE3 program

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85