Out of the Abyss: Growth, Challenges and Opportunities in

the Post-Crisis WorldAnnual Issues Symposium of the National Council

on Compensation InsuranceOrlando, FLMay 5, 2011

Download at: www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

What in the World Is Going On?

Is the World Becoming a Riskier Place?

Are We Really Crawling Out of the Abyss or Falling Into a New One?

3

Uncertainty, Risk and Fear Abound

Resurgent Terrorism Risk (e.g., Bin Laden Killing) Record Tornado Activity in the US Japan, New Zealand, Haiti, Chile Earthquakes Political Upheaval in the Middle East Echoes of the Financial Crisis Housing Crisis US Debt and Budget Crisis Sovereign Debt & Currency Crises Inflation Runaway Energy & Commodity Prices Era of Fiscal Austerity Reshuffling the Global Economic Deck China Becomes #2 Economy in the World Nuclear Fears Manmade Disasters (e.g., Deepwater Horizon)

Are “Black Swans” everywhere or

does it just seem that way?

4

Terrorism, Workers Compensation and the

Killing of Osama bin Laden

Do We Still Need the Terrorism Risk Insurance Program?

5

Bin Laden, Justice and the Future of Terrorism, Risk and Insurance

Sources: Insurance Information Institute.

Property-WTCProperty -

Other

Bin Laden is Dead and Justice Is Served, But What Are the Implications for the P/C Insurance Industry and

Workers Comp in Particular?

6

Distribution of Insured September 11 Losses by Line ($ Billions, 2009 Dollars)

Sources: Insurance Information Institute research.

Property-WTCProperty -

Other

9/11 remains the largest WC loss in US history

($2.2B), even though 9/11 property losses were

surpassed by Hurricane Katrina in 2005

7

Thwarted and Failed Terrorism Attempts Against the US in 2009 and 2010

Sources: Terrorism Risk: A Reemergent Threat, Insurance Information Institute (http://www.iii.org/white_papers/terrorism-risk-a-reemergent-threat-2011.html); Federal Bureau of Investigation.

Property-WTCProperty -

Other

9/11 remains the largest WC loss in US history ($2.2 bn), even though

9/11 property losses were surpassed by Hurricane

Katrina in 2005

There Have Been Numerous Unsuccessful Attempts by Terrorists to Attack the US Over the Past 2 Years

Workers Compensation Combined Ratio: 1994–2011P

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4 10

3.5

10

4.4 1

10

.5

11

7.5 12

1.5

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 10E 11P

Workers Comp Results Can Be Materially Influenced by Terrorism Activity

Sources: A.M. Best Aggregates and Averages; Best’s Review Preview; Insurance Information Institute.

The 9/11 attack added 1.9 points to the WC

combined ration in 2001

Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill)

Type of Coverage New York WashingtonSan

FranciscoDes

Moines

Group Life $82.0 $22.5 $21.5 $3.4

General Liability 14.4 2.9 3.2 0.4

Workers Comp 483.7 126.7 87.5 31.4

Residential Prop. 38.7 12.7 22.6 2.6

Commercial Prop. 158.3 31.5 35.5 4.1

Auto 1.0 0.6 0.8 0.4

TOTAL $778.1 $196.8 $171.2 $42.3

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

Workers Comp is and Remains the Most Vulnerable of All P/C Lines, Despite Killing of Bin Laden

Insured Loss Estimates: Truck Bomb Terrorist Attack ($ Bill)

Type of Coverage New York WashingtonSan

FranciscoDes

Moines

Group Life $0.3 $0.2 $0.3 $0.1

General Liability 1.2 0.4 0.7 0.2

Workers Comp 3.5 2.8 3.9 1.5

Residential Prop. 0.0 0.0 0.0 0.0

Commercial Prop. 6.8 2.1 3.9 1.2

Auto 0.0 0.0 0.0 0.0

TOTAL $11.8 $5.5 $8.8 $3.0

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

Workers Comp is and Remains the Most Vulnerable of All P/C Lines, Despite Killing of Bin Laden

Potential Insured Losses from Terrorist Attack on Major Corporate HQ in Houston

Workers Comp, $4.6

Property, $3.9

Life, $0.5 Liability,

$1.0

*Break down is based on $10 billion loss estimate. Range of estimates is $10 - $12 billion. Source: RMS.

Potential workers comp losses in all major cities are large

12

Workers Compensation, Terrorism Risk Insurance and bin Laden’s Death Bin Laden’s Killing, at Least in the Short Run, Could Actually Increase Risk as Al

Qaeda’s Sympathizers Seek to Avenge His Death US State Department: “Enhanced potential for anti-American violence.”

Longer-Run Impact is Unclear Al Qaeda has many splinter groups

Current Mideast conflicts (e.g., Libya/Qaddafi attack) could increase risk

Domestic/Home Grown Terror Risk Looms Large Today than in 2001 Several potentially severe attacks have been thwarted

Challenge to Maintain Terrorism Risk Insurance Program through 2014 Will the Administration try to scale TRIPRA back under budget pressure using bin Laden’s death as

the rationale?

Will a Lack of Attacks, Death of bin Laden Influence Terrorism Risk Insurance Program Renewal Debate Ahead of 2014 Expiration? Narrowing of coverage (WC is the least likely of lines to be excluded)

Increased private insurer retention relative to federal government backstop

TRIA and Its Successors: Economic Stimulus Programs that Have Cost the Government Nothing Programs promote employment, construction and investment

13

Summary of Japan Earthquake

& Impacts on US P/C Markets

The March 11 Quake & Other Major CATs Are Big Events, But Will They, Can They Impact US P/C

Markets?

14

Location of March 11, 2011 Earthquake Near Sendai, Honshu, Japan

Source: US Geological Service; Insurance Information Institute.

Magnitude 9.0 earthquake struck Japan at 2:46PM local time (2:46AM Eastern) off northeast coast of Honshu, 80 miles east of Sendai

Quake is among the 5 strongest in recorded history and the strongest in the 140 years for which records have been kept in Japan

12,000+ fatalities

Economic loss: $100 - $300 bn

Insured losses up to $45 bn

Fukushima Nuclear Plant threat level raised to Category 7 on April 11 (highest, same as Chernobyl)

Significant tsunami damage was recorded in Japan; relatively minor damage on the U.S. West Coast

March 11 Earthquake Factsas of 4/21/2011

LOCATION130 km (80 miles) E of Sendai, Honshu, Japan178 km (110 miles) E of Yamagata, Honshu, Japan178 km (110 miles) ENE of Fukushima, Honshu, Japan373 km (231 miles) NE of TOKYO, Japan

Insured Japan Earthquake Loss Estimates*

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

Towers Watson

AIR Worldwide

RMS

Eqecat

$21 - $34 bn

$20 - $45 bn

$12 - $25 bn

$25 - $35 bn

15

*As of April 21, 2011. Towers Watson estimate includes $3.0 (low) to $4.9 billion (high) in life insurance losses. RMS estimate includes insured life/health losses of $3 to $8 billion.Sources: AIR Worldwide, Eqecat, RMS, Towers Perrin; Insurance Information Institute.

(Insured Losses, $ Billions)

Economic losses are likely to total in the $200-$300 billion

range, meaning only a fraction of the loss is insured

16

Recent Major Catastrophe Losses

(Insured Losses, $US Billions)

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

$30.0

$10.0$8.0

$5.0$2.0$0.5

$0

$5

$10

$15

$20

$25

$30

$35

Cyclone Yasi(Australia) Feb

2011

Australia Floods(Dec - Feb 2011)

New ZealandQuake (Sep 2010)

Chile Earthquake(Feb 2010)

New ZealandQuake (Feb 2011)

Japan Earthquake(Mar 2011)

Insured Losses from Recent Major Catastrophe Events Exceed $55 Billion, an Estimated $53 Billion of that from Earthquakes

The March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current

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

Source: Holborn; RAA.

* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.

Significant Market Losses, 1985-2011*

18

Change in Reinsurer Capital, 2007-2010:Q3

19

Potential Impacts of Japan Quake & Other Major CATs on

P/C (Re)Insurance Markets

Impacts Could Be Felt Well Beyond Japan

20

Nonlife (P/C) Insurance Market Impacts of Japan Earthquake No Impact for US Workers Compensation Markets Primary Insurance: Domestic Japanese Insurers Take Big Losses Few US/Foreign Insurers Had Direct Exposure to Japanese P/C Market

Low single-digit market share for a small number of companies Not a capital event for any non-Japanese primary insurer

Significant Absorption of Loss by Japanese Government Residential earthquake damage Nuclear-related property and liability damage

Significant Impacts for Global Reinsurers Property-Catastrophe covers on Commercial Lines Business Interruption/Contingent Business Interruption

Currently an Earnings Event for Global Reinsurers Not a capital event: Global reinsurance markets entered 2011 with record capital

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

Reinsurance Coverage Remains Available in Affected Regions Marginal Impact of Cost of US Property-Cat Reinsurance

Market remains well capitalized and competitive Elevated global cat activity could halt price declines for property/cat reinsurance

21

What a Tumultuous Year It Has Been for the US Economy!

Labor Market Challenges Are the Root of Most Exposure Growth Challenges—Especially in WC

22

Labor Market Trends

Massive Job Losses Sapped the Economy and P/C Exposure, But

Trend is Improving

23

Unemployment and Underemployment Rates: Falling Faster in 2011?

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment rate fell to 8.8%

in March

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 15.7% in March 2011

January 2000 through March 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure

Mar 11

24

Labor Underutilization: Broader than Just Unemployment

11.2%

16.4%16.5%16.3%

16.8%17.0%17.5%

17.2%17.3%

16.5%16.8%16.9%17.1%

16.6%16.5%16.5%16.7%17.1%17.0%17.0%

16.7%

16.1%15.9%15.7%

10%

11%

12%

13%

14%

15%

16%

17%

18%

Sep08

May09

Jun09

Jul09

Aug09

Sep09

Oct09

Nov09

Dec09

Jan10

Feb10

Mar10

Apr10

May10

Jun10

Jul10

Aug10

Sep10

Oct10

Nov10

Dec10

Jan11

Feb11

Mar11

% of Labor Force

Marginally Attached and Unemployed Persons Account for 15.7% of the Labor Force in March 2011 (1 Out Every 6.4 People). Unemployment

Rate Alone was 8.8%. Underutilization Shows a Broader Impact on WC and Other Commercial Exposures

NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute.

18

67

92

13

65 1

27

42

15

-10

9-1

46

5 97

23

-12

-85 -58

-16

1-2

53

-23

0-2

57

-34

7-4

56

-54

7-7

34 -66

7-8

06 -7

07

-74

4 -64

9-3

34

-45

2-2

97 -2

15

-18

6-2

62

75

-83

16 6

2

24

15

1 61 1

17

14

31

12 1

93

12

8 16

79

42

40

23

0

14

4

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Monthly Change in Private Employment

January 2008 through March 2011* (Thousands)

Private Employers Added 1.999 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (Local

Govt. Employment is Down 416,000 Since Sept. 2008 Peak)

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

Private employers added jobs in every month in 2010 for a total of

1.435 million for the year

230,000 private sector jobs were created in

March

Not Enough: We need about 125,000 new jobs (private and public) per month just

to absorb labor force growth

26

US Unemployment Rate

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.6

%

9.6

%

8.9

%

8.8

%

8.7

%

8.5

%

8.4

%

8.2

%

8.1

%

7.9

%

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

Rising unemployment eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10% in

late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/11); Insurance Information Institute

2007:Q1 to 2012:Q4F*

Unemployment forecasts remain stubbornly high

through 2011, but still imply millions of new

jobs will created.

Jobless figures are being revised downwards

27

US Unemployment Rate Forecasts

8.7% 8.6%8.4%

8.2% 8.1%7.9%7.8% 7.7%7.5%

8.8%9.1%

8.9%9.1%

8.4%

8.8%8.7%

8.5%

8.0%8.2%

8.4%8.6%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4

10 Most PessimisticConsensus/Midpoint10 Most Optimistic

Unemployment will remain high even under the most optimistic of scenarios, but

forecasts are being revised downwards

Sources: Blue Chip Economic Indicators (4/11); Insurance Information Institute

Stubbornly High Unemployment Will Slow the Recovery of theWorkers Comp Exposure Base, But Momentum Is Moving in the

Right Direction

Quarterly, 2011:Q2 to 2012:Q4

28

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

13.2

12.0

11.1

11.0

10.3

10.2

10.2

10.0

10.0

9.9

9.7

9.7

9.5

9.5

9.5

9.3

9.2

9.2

9.2

9.1

9.1

9.1

8.9

8.8

8.8

8.5

0

2

4

6

8

10

12

14

16

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

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for March 2011, seasonally adjusted.

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

In March 34 states reported over-the-month unemployment rate decreases, 7

had increases, and 9 states and the District of Columbia had no change.

23 states + DC had unemployment rates above

the US average in Mar. 2011, 17 states were below.

29

8.4

8.1

8.1

8.1

8.0

8.0

7.8

7.8

7.6

7.6

7.4

7.4

7.4

6.9

6.8

6.6

6.3

6.3

6.2

6.1

6.1

5.4

5.2

4.9

4.2

3.6

0

2

4

6

8

10

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

Une

mpl

oym

ent R

ate

(%)

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

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

In March 34 states reported over-the-month unemployment rate decreases, 7

had increases, and 9 states and the District of Columbia had no change.

30

Change in Number Employedin Select Industries, Mar. 2011 vs. Mar. 2010

78

-36 -37 -33

7988

193196

283

529

-100

0

100

200

300

400

500

600P

rof.

Bus

ines

sS

erv.

Hea

lth C

are

Man

ufac

turin

g

Leis

ure

&H

osp.

Tran

spor

tatio

n

Ret

ail T

rade

Min

ing

&Lo

ggin

g

Con

stru

ctio

n

Info

rmat

ion

Fina

ncia

l

Sources: US Bureau of Labor Statistics “Employment Situation, March 2011”; Insurance Information Institute.

There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery

ThousandsProfessional Business Services,

Health Care, and Manufacturing (!) were the job growth leaders in the

last twelve months.

$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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

31

Payroll Base* WC NWP

Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

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

29% of NPW has been eroded away by the soft market and weak economy

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

32

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

34

.4

23

.1

14

.2

10

.2

9.0

4.6

1.4

-3.7

-7.3

-9.3

-10

.0

-10

.3

-10

.9

-10

.9

-13

.0

-14

.7

-15

.3

-15

.9

-16

.9

-17

.8

-19

.8

-21

.4

-21

.7

-35-30-25-20-15-10-505

10152025303540

OK

MT ID LA

SD IA KS

NY WI

PA

MS IL

NM NJ

NE

MD

NC AL

CT VA

SC

AR

MN

Pe

ce

nt

ch

an

ge

(%

)

*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 States5

,80

7.1

Only 9 (small) states showed growth in workers

comp premium volume between 2005 and 2010

33

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

-22

.6

-23

.7

-24

.2

-25

.0

-25

.2

-25

.2

-25

.3

-26

.8

-26

.9

-28

.1

-28

.3

-28

.7

-29

.0

-30

.1

-32

.5

-32

.6

-33

.8

-34

.7

-36

.1

-42

.7

-45

.4

-50

.7

-51

.2

-57

.7

-70

-60

-50

-40

-30

-20

-10

0

AZ

ME

GA

KY IN NH

OR

DC

MA

TN VT

US

TX

AK

MO MI

UT RI

CO

DE

NV HI

CA

FL

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

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

the past 5 years

*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.

Workers Comp DPW plunged 28.7% from

between 2005 and 2010

34

Economic Impediments to Faster Growth in Workers Comp Payroll Exposures

The Economy is Still Not Firing on All Cylinders

35

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/11; Insurance Information Institute.

2.7

%

0.9

%

3.2

%

2.3

%

2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.7

%

1.7

%

2.6

%

3.1

%

1.8

% 3.2

%

3.3

%

3.4

%

3.1

%

3.2

%

3.2

%3

.3%

4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   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

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

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

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

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

positive for insurance demand and exposure growth.

2011 Financial Overview State Economic Growth Varied in 2009

36

Mountain, Plains states still growing the fastest

Some Southeast states growing well, but others

among the weakest

37

Real GDP Growth vs.Real P/C NWP Growth: 1978-2010

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 4/11; Insurance Information Institute

-7%

-4%

-1%

2%

5%

8%

11%

14%

17%

20%

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

Rea

l NW

P G

row

th

When real GDP grows by about 3%, as is forecast for 2011-2012,real NWP growth has ranged from -2.9% to +5.8%

Real GDP Growth

Trend line

3% real GDP forecast

for 2011-12

1986: 3.5% real GDP growth and a very

different environment from today

38

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

44

.8

25

.4

19

.8

17

.3

16

.6

14

.2

13

.9

12

.4

12

.3

11

.9

9.1

8.1

8.1

7.1

6.8

5.4

5.2

4.7

3.8

3.7

3.1

3.0

1.5

1.2

1.1

0

5

10

15

20

25

30

35

40

45

ND

SD LA

WY

OK

WV

KS IA TX

MT

NE

DE

MS

NM SC

DC

UT

AR

NC ID WA

AL

WI

AK

TN

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

39

0.7

0.6

0.1

-0.1

-0.3

-0.5

-0.8

-1.4

-1.6

-1.7

-2.5

-2.8

-2.9

-3.4

-3.6

-4.1

-4.5

-4.7

-4.8

-5.7

-5.8

-8

-8.2

-8.3

-13

.5

-14

.2

-15

.5

-20

-15

-10

-5

0

5M

D

MO

KY IN NY

GA

MN

VA

US

PA

OR FL IL CT

VT

OH RI

CO

NJ HI

ME

NH

MA

AZ

NV MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

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

the past 5 years

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

US Direct Premiums Written declined by 1.6% between 2005

and 2010

40

(Millions of Units)

New Private Housing Starts, 1990-2016F

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

3 0.8

3

1.2

0 1.3

3 1.4

3

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 11F12F13F14F15F16F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 4/11); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

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

holding back payroll exposure growthJob growth,

improved credit market conditions and demographics

will eventually boost home construction

41

Value* of Construction Put In Place

*Seasonally adjusted annual rate Source: http://www.census.gov/const/C30/release.pdf

Since the recession started, private residential and nonresidential construction together are down $300 billion (annual rate), a drop of 38%.

Public construction has hardly moved.

$225

$250

$275

$300

$325

$350

$375

$400

$425

Nonresidential Public Residential Nonresidential PrivateBillions

Total Construction Spending (Annual Rate)December 2007: $1,109.0BNovember 2010: $ 810.2 B

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Ju

n 1

0

Se

p 1

0

De

c 1

0

Ma

r 1

1

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 42

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 77.4% of industrial

capacity in Mar. 2011, above the June 2009

low of 68.3%

December 2007-June 2009 Recession

43

7.67 7.70 7.75 7.79

7.78 7.80 7.

86 7.92

7.92

7.94 7.97 8.02

8.03

8.04 8.

12 8.19

8.20 8.25 8.

34 8.39 8.41 8.45 8.

54 8.62

8.57 8.

65 8.72 8.

788.

74 8.77 8.81 8.84

8.67

8.69 8.73 8.75

8.64 8.68 8.

75

7.50

7.75

8.00

8.25

8.50

8.75

9.00

2001

:Q1

2001

:Q2

2001

:Q3

2001

:Q4

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

Number of Private Business Establishments, 2001:Q1-2010:Q3

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

In 2009:Q1 a net of 165,000 businesses disappeared.By 2010:Q3 73,000 new ones appeared,

returning us to the level first attained three years before, in 2007:Q3.

Millions

No net growth in number of businesses since 2007

44

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

82

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

Business Bankruptcy Filings,1980-2010

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

2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009—which were up 40% from 2008 and the most since

1993.

% Change Surrounding Recessions

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

45

Private Sector Business Starts, 1993:Q2 – 2010:Q3*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

207

199

191 19

317

2 176

169

184

172

172

182

203

150

160

170

180

190

200

210

220

230

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

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

* Data through September 30, 2010 are the latest available as of May 3, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

344,000 new business starts were recorded through the first half of 2010, which was likely the slowest year for

new business starts since 1993.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010:Q3 526,000

46

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine, Trucking)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

Many industries are

poised for growth, but

many insurers do not write in

these economic segments

Where Will the Growth in WC Exposure Come From?

47

Industry and Occupation Growth Analysis

48

(Thousands)

704

654

446

322

304

256

236

118

102

788

838

1,431

1,683

2,657

4,017

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Health Care and Social Assistance

Professional, Scientific, Tech. Srvs.

Education Services

Administration, Support, Waste Mgmt & Removal

Accomodation & Food Services

Government

Other Services (excl. Govt.)

Retail Trade

Transportation and Warehousing

Finance & Insurance

Arts, Entertainment & Recreation

holesale Trade

Real Estate, Rental & Leasing

Information

Mgmt. of Companies & Enterprises

Health, Science and Education will be

important sources of exposure growth for WC

insurers this decade

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

Numeric Change in Wage and Salary Employment in Service-Providing Industries: 2008-2018P

49

P/C Insurance Industry Financial Overview

Profit Recovery ContinuesEarly Stage Growth Begins

P/C Net Income After Taxes1991–2010 ($ 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

4,6

70

$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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5%

P-C Industry 2010 profits were$34.7B vs.$28.7B in 2009, due mainly to $5.7B in realized capital

gains vs. -$7.9B in previous realized capital losses

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

51

ROE: Property/Casualty Insurance,1987–2010*

* Excludes Mortgage & Financial Guaranty in 2008 - 2010.Sources: ISO, Fortune;

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E

P/C Profitability Exhibits Both Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

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

Combined Ratio / ROE

* 2009 and 2010 figures are return on average statutory surplus. 2008, 2009 and 2010 figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.3100.8101.0

7.5%7.4%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

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

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

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

10% in 2005 and 16% in 1979

PREMIUM GROWTH TRENDS

53

Winds of Change or Moving Sideways?

54

-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 0910

E11

F

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

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

Shaded areas denote “hard market” periodsSources: 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.

NWP was up 0.9% in 2010 with forecast growth of 1.4% in 2011

55

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

Sources: ISO, Insurance Information Institute.

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

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%

10.3

%10

.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.

3%

-10%

-5%

0%

5%

10%

15%

20%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

The long-awaited uptick:

mainly personal lines

56

Net Written Premium Growth by Segment: 2008-2011F

-0.1%

-9.4%

2.8%

-2.0%

2.5%

0.3%

-3.1%

-0.1%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Personal Lines Commercial Lines

2008 2009 2010P 2011F

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession

weigh on commercial lines.

Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted

again in 2010 and but will stabilize in 2011

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

UNDERWRITING

57

Cyclicality is Driven Primarily by the Industry’s Underwriting

Cycle, Not the Economy

58

P/C Insurance Industry Combined Ratio, 2001–2010*

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4 Sources: A.M. Best, ISO.

95.7

99.3100.8101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

59

Calendar Year Combined Ratios by Segment: 2008-2011F

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

102.4

98.9100

106

99.5

108

103.8104.5

9092949698

100102104106108110

Personal Lines Commercial Lines

2008 2009 2010P 2011F

Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

performance related to the prolonged commercial soft market

Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate

60

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$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

E

11

E

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, 1992–2011E

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

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

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

EXPENSES

61

Expense Ratios Are Highly Cyclical and Contribute Deteriorating Underwriting Performance

Underwriting Expense Ratio*:Personal vs. Commercial Lines, 1990-2010E**

24.3%24.7%

24.4% 24.3%

26.4%26.6%

27.7%28.2%

29.9%

24.5%

26.4%

26.4%26.2%

24.7%24.7%24.6%24.4%

23.4%23.7%

23.5%

25.0%

23.9%

25.6%

25.6%

24.8%

30.5%30.6%

25.6%

28.5%

26.4%

26.6%

25.0%

29.1%

30.0%30.5%

28.4%

28.3%27.4%

27.8%

28.7%

29.3%

29.9%

20%

22%

24%

26%

28%

30%

32%

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

Personal Lines Commercial Lines

*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.

Commercial lines expense ratios are

highly cyclical

INVESTMENTS: THE NEW REALITY

63

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–20101

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$52.9$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

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

Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to

Fall by 50% in 2008

1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2010 were the best

since 2007

65

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

War

rant

y

Surplu

s Line

s

Med

Mal

WC

Reinsu

ranc

e**

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

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

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

Financial Strength & Underwriting

66

Cyclical Pattern is P-C Impairment History is Directly Tied to

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20108

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15 16 18

11

5

0

10

20

30

40

50

60

70

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

Source: A.M. Best Special Report “1969-2010 Impairment Review,” June 21, 2010; Insurance Information Institute.

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

8 of the 18 in 2009 were small Florida carriers. Total also

includes a few title insurers.

68

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2010

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

0

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2010 impairment rate was 0.35%, down from 0.65% in 2009 and near the record low of 0.17% in 2007; Rate is still less

than one-half the 0.81% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007

69

Reasons for US P/C Insurer Impairments, 1969–2010

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

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

70

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010

2.0%4.4%

4.8%

6.5%

6.9%

7.7%

8.1%

10.9%

22.2%

26.6%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade

Workers Comp

Financial Guaranty

Pvt. Passenger Auto

Homeowners

Commercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

SuretyTitle

CAPITAL MANAGEMENT & LEVERAGE

71

Excess Capital is a Major Obstacle to a Market Turn;

Capital Management Decisions Will Impact Market Direction

72

Policyholder Surplus, 2006:Q4–2010: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$556.9

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

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

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)

Surplus set a new record in 2010:Q4*

*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 $0.76 of

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

Inflation

73

Is it a Threat to Claim Cost Severities

74

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

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

2.7

2.1 2.1 2.2

2.92.4

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 11F 12F 13F 14F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 4/11 (forecasts).

The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), 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

Higher energy, commodity and food prices are pushing up inflation in 2011, but not longer turn

inflationary expectations.

P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

1.6%1.0%

3.4%

8.8%

6.1%

3.3%

4.3%

3.1%

0%

3%

6%

9%

Overall CPI "Core" CPI Medical CPI InpatientHospitalServices

OutpatientHospitalServices

Physicians'Services

PrescriptionDrugs

Medical CareCommodities

Price Changes in 2010

Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least

75

Excludes Food and Energy

Financial Services Reform

76

Insurers Not as Impacted as Banks, But Dodd-Frank

Implementation Has Been a Concern for Insurers

77

Financial Services Reform:What does it mean for insurers?

Systemic Risk and Resolution Authority

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

Regulator representative is MO Insurance Commissioner Huff

No industry representative has been appointed yet

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

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

Federal Insurance Office (FIO)

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

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

IL Insurance Director Michael McGraith will become first FIO Director

CONCERN: FIO morphs into quasi/shadow or actual regulator

The Dodd Frank Wall Street Reform and Consumer Protection Act

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

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI C

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

= A= B= C= D= F= NG

Source: Heartland Institute, May 2010

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+

D

NG

NG

D F

F

2010 Property and Casualty InsuranceReport Card

Not Graded: District of ColumbiaMississippiLouisiana

Obesity

79

Obesity Remains a Growing Concern for Workers Comp Insurers

Impact of Obesity on WC Systems Varies With Health Fitness of Population

Source: Behavioral Risk Factor Surveillance System; Insurance Information Institute

<10%

15%-19%

≥20%

WC systems in the Southeast and Midwest incur a disproportionate burden because a

relative highly share of the labor force is obese

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