P/C Industry Outlook:2013 and Beyond

SITALas Vegas, NV

October 21, 2013

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

Here’s What Some ofOur Customers Are Like

22

3

3/8 of US Adults Say They Get Less Than 6 Hours of Sleep per Night

Source: CDC, National Health and Nutrition Examination Survey, Hyattsville, MD, U.S. Department of Health and Human Services, CDC, National Center for Health Statistics; 2007-2010; highlighted at http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6236a9.htm?s_cid=mm6236a9_e

37.3%

60.4%

2.3%

4

CDC Report: Cell Phone Use While Driving, US and Europe, Fall 2011

Sources: “Mobile Device Use While Driving—United States and Seven European Countries, 2011,” in Morbidity and Mortality Weekly Report, Centers for Disease Control and Prevention, Vol. 62, No. 10, (March 15, 2013) available at http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6210a1.ht5m?s_cid=6210a1_e ;Insurance Information Institute

7.8%

2.5%

8.8%

4.3%

10.4%

5.2%

12.8%

2.8%

15.7%

8.1%

19.5%

5.9%

20.4%

6.5%7.7%

27.5%

0%

10%

20%

30%

Talked on cell Texted/emailed

U.S. U.K. Germany France Spain Belgium Netherlands Portugal

“In the past 30 days, how often have you talked on the phone while you were driving?”

“In the past 30 days, how often have you sent a text message or e-mail while you were driving?”

Percent saying“regularly” or“fairly often”

5

Even Frequent & Severe Floods Haven’t Changed Flood Insurance Ownership Much

1Asked of those who have homeowners insurance and who responded “yes”.

Source: Insurance Information Institute Annual Pulse Survey.

Q. Do you have a separate flood insurance policy?1

Despite extensive flooding (and wide publicity),few U.S. homeowners say they have a flood insurance policy;

the percentage is lowest in the Northeast at 10 percent.

5%

13%

19%

12%14%

6%

21%

6%

10%12%

15%

11%

0%

5%

10%

15%

20%

25%

Northeast Midwest South West

May 2011May 2012May 2013

After Hurricane

IreneAfter

SuperStorm Sandy

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

1998.3

1999.1

1999.3

2000.1

2000.3

2001.1

2001.3

2002.1

2002.3

2003.1

2003.3

2004.1

2004.3

2005.1

2005.3

2006.1

2006.3

2007.1

2007.3

2008.1

2008.3

2009.1

2009.3

2010.1

2010.3

2011.1

2011.3

2012.1

2012.3

2013.1

20%

22%

24%

26%

28%

30%

32%

34%

22.1%

22.5%

22.3% 23.0%

22.8%

23.0%

22.9% 23.5% 24.4%

24.4%

24.3% 24.9%

24.4%

24.4%

24.8%

25.2%

25.2%26.3%

26.5%

26.2%

27.9%

27.2%

27.0%

27.4%27.9%

27.3%27.8%

27.6%

26.8% 27.6%

29.3%

29.5%

27.9% 28.5%

28.7%

30.8%

29.3% 30.1%

29.1%30.3%

30.1% 30.9%

31.0%

30.7%

31.0%

31.4%

30.9%

31.2%

31.6%

31.3%

31.5%

31.4%32.8%

32.3%

31.1%32.2%

32.2%

32.5%

31.8%

31.8%

31.7%32.9%

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

The brown bars indicate recessions.

Labor Force participation rate

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

1 in 3 in this age group are working. Virtually

none of them are “baby boomers”

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

19

98

.1

19

98

.3

19

99

.1

19

99

.3

20

00

.1

20

00

.3

20

01

.1

20

01

.3

20

02

.1

20

02

.3

20

03

.1

20

03

.3

20

04

.1

20

04

.3

20

05

.1

20

05

.3

20

06

.1

20

06

.3

20

07

.1

20

07

.3

20

08

.1

20

08

.3

20

09

.1

20

09

.3

20

10

.1

20

10

.3

20

11

.1

20

11

.3

20

12

.1

20

12

.3

20

13

.1

9%

12%

15%

18%

21%

12.5%

12.2%

12.4% 12.9%

12.4%

13.6%

13.1%

13.1%

13.3%

13.5%

13.6%

13.8% 14.4%

13.7% 14.2%

14.2%

13.8%14.2%

14.0%

14.0%14.4%

14.4%

14.6%

14.9%

14.9% 15.4%

15.6%

15.3%16.4% 17.0%

15.8%16.2% 16.7%

16.9%

17.2%

17.0%

16.7%

16.8%

18.0%

17.5%

17.3%

16.9%

18.6%

18.2%

17.7%

17.9%18.9%

19.2%

18.0%

18.1%

17.4%18.4%

18.0%18.4%19.3%

19.5%

19.2%

19.1% 19.9%

19.6%

18.8% 19.3%

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

Labor Force participation rate

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

Nearly 1 in 5 in this age group is working.

A dozen years ago it was 1 in 8.

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

8

Growth Will Expand Insurer Exposure Base Across Most Lines

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012100

110

120

130

140

150

160

NWP Nominal GDP

Yearly Nominal U.S. GDP vs.P/C Net Written Premiums: 2000-2012

Sources: http://www.bea.gov/national/xls/gdplev.xls ; SNL Financial; I.I.I. calculations

Index: 2000 = 100

“Hard” market: NWP grew much faster than the

overall economy

Post recession: comparable growth rates

“Soft” market: NWP slipped

before the overall economy did

Recession

10

US Real GDP, Quarterly, 2013-14 October 2013 Forecasts

2.2%

2.9%

3.6%

2.2%2.0% 2.0%

1.6%

2.9%

2.4% 2.6%2.8%

3.5%3.4%

3.3%3.1%

1%

2%

3%

4%

13:Q4 14:Q1 14:Q2 14:Q3 14:Q4

10 Most Pessimistic Median 10 Most Optimistic

Sources: Blue Chip Economic Indicators (10/13); Insurance Information Institute

Real GDP Growth Rate

Despite the sequester and other challenges to the U.S. economy,virtually every forecast in the Blue Chip universe in early September

sees improvement ahead

11

Real GDP Growth: Recent Recessionsand Recoveries, Yearly, 1985-2012

Source: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Real GDP Growth (%)

In most recoveries, real yearly GDP growth is

often 3% or more

In the current recovery, real yearly GDP growthhas been 2.4% or less

But following the 2001 recession, real yearly GDP

growth was weaker than 3%

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. 12

State-by-State Leading Indicatorsthrough 2013:Q4

13

15

P/C Insurance:Forces Affecting Personal

Lines

Brighter Days Ahead,but Not Without Challenges

16

Millions of Units

Private Housing Unit Starts, 1990-2014F

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 0.9

3 1.1

41.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

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: U.S. Department of Commerce; Blue Chip Economic Indicators (10/13); Insurance Information Institute.

Homeowners insurers are starting to see exposure growth for the first time since 2005. Commercial insurers with construction risk exposure, surety

also benefit.

Starts plunged 72% from 2005-2009 to lowest

level since records began in 1959

Forecast range for 2013 is 0.90 to 1.02 million

unitsHousing“Bubble”

So Far, the Pickup Is Mostly in Multi-Family Housing Starts

100

150

200

250

300

350

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

400

600

800

1000

1200

1400

1600

1800

units in multi-family buildings single family units

*average of annualized seasonally adjusted January-August 2013 data; August is preliminary.Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.

Thousands of Units, Multi-Family

Is the pickup slowing down? 2013:Q1 multi-unit starts were ata seasonally-adjusted annual rate of 325,000,

but starts since then were at a SAAR of 261,000.

Multi-family-unit starts rose in 2011, more in 2012, still

more so far in 2013.

Thousands of Units, Single Family

Multi-family plunge did not begin until 2009

Single family plunge began

in 2006

18

Rental-Occupied Housing Units as % ofTotal Occupied Units, Quarterly, 1990-2013

30%

31%

32%

33%

34%

35%

36%

37%9

0:Q

1

91

:Q1

92

:Q1

93

:Q1

94

:Q1

95

:Q1

96

:Q1

97

:Q1

98

:Q1

99

:Q1

00

:Q1

01

:Q1

02

:Q1

03

:Q1

04

:Q1

05

:Q1

06

:Q1

07

:Q1

08

:Q1

09

:Q1

10

:Q1

11

:Q1

12

:Q1

13

:Q1

Sources: US Census Bureau, Residential Vacancies & Home Ownership in the Second Quarter of 2013 (released July 30, 2013) and earlier issues; Insurance Information Institute.

Trough in 2004:Q2 and Q4 at 30.8%

Since the Great Recession ended, renters occupied 3.6 million more units (+9.9%)—outstripping population growth (+2.9%)

18

Millions

Latest was 35.0% in

2013:Q1 & Q2

Trend down began in 1994:Q3 from

36.2% in Q2

Increasing percent of

owners

Increasing percent of

renters

19

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4

15.6 16

.116.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F

(Millions of Units)

Auto/Light Truck Sales, 1999-2014F

Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (10/13); Insurance Information Institute.

Job growth and improved credit market conditions will boost auto sales in 2013 and beyond, bolstering the manufacturing sector and the

economy generally.

Lowest level since the late

1960s

Forecast range for 2013 is 15.3 to 15.8 million

units

Truck purchases by contractors are

especially strong

20

But Something Unusual is Happening:Miles Driven*, 1990–2013

*Moving 12-month total. The latest data is for June 2013. Note: Recessions indicated by gray shaded columns..Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

2,100

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

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

A record: miles driven has been below the prior

peak for 67 straight months. Previous record

below peak was in the early 1980s (39 months)

Will the trend toward hybrid and non-gasoline-powered vehicles affect

miles driven? What about the aging and

retirement of the baby boomers?

Miles Driven Growth per 5-Yr Span1997 vs. 1992: 13.9%2002 vs. 1997: 11.5%2007 vs. 2002: 6.1%2012 vs. 2007: -3.0%

Some of the growth in miles driven is due to population growth: 1997 vs. 1992: +5.1%2002 vs. 1997: +7.4%2007 vs. 2002: +4.7%2012 vs. 2007: +3.4%

Peak in November 2007

22

P/C Insurance:Forces Affecting

Commercial Lines

Brighter Days Ahead,but Not Without Challenges

23

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013:Q2

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

$7,25004

:Q4

05:Q

105

:Q2

05:Q

305

:Q4

06:Q

106

:Q2

06:Q

306

:Q4

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

Prior Peak was 2008:Q1 at $6.54 trillion

Latest (2013:Q2) was $7.09 trillion, a new peak -- $860B above

2009 trough

Recent trough (2009:Q1) was $6.23 trillion, down

4.7% from prior peak

Payrolls are 12.1% above

their 2009 trough

23

24

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, January 1992—June 2013

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

Monthly shipments in Nov. 2012 exceeded the pre-crisis (July 2008) peak but have since receded slightly. 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 June 2013 was up 34% to $481.8B from its May 2009 trough. June figure is slightly

below its record high in Nov. 2012. Modest weakening in recent months.

$ Millions

24

25

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

$1.1

6

$1.1

8$1

.22

$1.4

4$1

.48

$1.4

9

$1.5

0$1

.49

$1.4

3$1

.37

$1.2

7

$1.2

1$1

.18

$1.1

7$1

.17

$1.1

8

$1.2

0$1

.24 $1

.28 $1

.35

$1.3

7 $1.4

2$1

.46 $1

.51

$1.5

3$1

.56

$1.1

3

$1.2

5 $1.3

0$1

.39

$1.0

$1.1

$1.2

$1.3

$1.4

$1.5

$1.6

06:Q

1

06:Q

2

06:Q

306

:Q4

07:Q

107

:Q2

07:Q

3

07:Q

408

:Q1

08;Q

208

:Q3

08:Q

4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

3

12:Q

413

:Q1

13:Q

2

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

*Latest data, released 8/29/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

$Trillions In nominal dollar terms, this is an

all-time high.Recession

26

Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2013:Q2*

0.70

%

0.74

%

0.64

%

0.67

%

0.81

%

1.07

%

1.18

% 1.69

% 2.25

% 2.80

%

3.57

%

3.43

%

3.05

%

2.83

%

2.73

%

2.44

%

1.89

%

1.65

%1.

49%

1.29

%

1.17

%

1.09

%

0.97

%

0.87

%

0.80

%0.

74%

0.71

%

0.63

%

0.62

%

0.63

%

0%

1%

2%

3%

4%

06:Q

1

06:Q

2

06:Q

3

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08;Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

309

:Q4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

Non-current loans (those past due 90 days or more or in nonaccrual status) are back to early-recession levels, fueling bank willingness to lend.

*Latest data, released 8/29/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

Almost back to “normal” levels of noncurrent

industrial & commercial loans

Recession

27

Business Bankruptcy Filings: Fallingbut Still High in 2012 (1994:Q1 – 2012:Q3)

13.9

13.6

12.9

12.0 13

.112

.2 12.6

12.9 13

.4 14.0

13.2

12.9 13

.814

.013

.512

.712

.411

.610

.39.

99.

210

.49.

09.

0 9.5

9.2

8.2 8.4

10.0

10.3

9.5 10

.09.

89.

79.

49.

58.

8 9.3

8.3

10.6

8.2

7.6 7.8 8.1 8.

7 9.5

12.8

4.1 4.

9 5.3 5.6 6.

3 6.7 7.

2 8.0 8.

79.

711

.512

.914

.316

.014

.2 15.0

14.6

14.5

14.0

13.0

12.4

12.3

11.7

11.1

11.0

10.4

9.2

8.4

0

2

4

6

8

10

12

14

16

18

94

:Q1

94

:Q3

95

:Q1

95

:Q3

96

:Q1

96

:Q3

97

:Q1

97

:Q3

98

:Q1

98

:Q3

99

:Q1

99

:Q3

00

:Q1

00

:Q3

01

:Q1

01

:Q3

02

:Q1

02

:Q3

03

:Q1

03

:Q3

04

:Q1

04

:Q3

05

:Q1

05

:Q3

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12

:Q3

Business bankruptcies were down 42% in 2012:Q3 vs. recent peak in 2009:Q2 but were still higher than 2008:Q1, the first full quarter of the Great Recession.

Bankruptcies restrict exposure growth in all commercial lines.Sources: American Bankruptcy Institute at www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute.

(Thousands) New Bankruptcy Law Takes Effect

Recessions in orange

Quarterly average for 2001:Q1-2005:Q3 was 8,915

28

Private Sector Business Starts,1993:Q2 – 2012:Q4*

175

185

173

182

187

193

184

189

189

185 18

819

519

119

920

420

319

519

619

520

620

620

018

919

920

620

619

921

320

420

920

020

620

420

419

420

4 208

199

193

191 19

320

020

720

320

921

020

921

622

122

122

022

121

022

121

420

621

620

820

720

119

118

817

217

716

918

317

5 179

188

200

189 19

219

8 202

193

191 19

319

2

201

160

170

180

190

200

210

220

230

93:Q

2

94:Q

1

95:Q

1

96:Q

1

97:Q

1

98:Q

1

99:Q

1

00:Q

1

01:Q

1

02:Q

1

03:Q

1

04:Q

1

05:Q

1

06:Q

1

07:Q

1

08:Q

1

09:Q

1

10:Q

1

11:Q

1

12:Q

1

Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure,

but now are recovering.* Data through Dec 31, 2012 are the latest available (posted July 30, 2013); Seasonally adjusted.Sources: Bureau of Labor Statistics, www.bls.gov/news.release/cewbd.t08.htm; NBER (recession dates).

(Thousands)Business Starts2006: 861,0002007: 844,0002008: 787,0002009: 701,000 2010: 742,000 2011: 781,0002012: 769,000

28

Recessions in orange

EEOC Workplace Discrimination Complaints, FY1997-FY2012*

80

.7

79

.6

77

.4 79

.9

80

.8 84

.4

81

.3

79

.4

75

.4

75

.8

82

.8

95

.4

93

.3

99

.9

99

.9

99

.4

70

80

90

100

110

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

Biggest jumps in FY2008 complaints came for retaliation and age

discrimination. But FY2008 excluded the worst of the recession.

Thousands of Complaints

*The federal fiscal year runs from Oct 1 of a given year to Sept 30 of the following year. The year is designated by its endpoint. Thus FY2009 covers the period from Oct 1, 2008 through Sept 30, 2009.Sources: EEOC at http://www.eeoc.gov/stats/charges.html ; I.I.I.

1997-2007 Avg.= 79,800/year

FY

2008-2012 Avg.= 97,600/year

31

U.S. InsuredCatastrophe Loss Update

Catastrophe Losses in Recent Years Have Been Very High

31

32

$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

$7

.9$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

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*

U.S. Insured Catastrophe Losses

*Through 6/2/13. Includes $2.6B for 2013:Q1 (PCS) and $5.32B for the period 4/1 – 6/2/13 (Aon Benfield Monthly Global Catastrophe Recap).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 U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Below

Average But Q3 Is Typically the Costliest Quarter.

Record tornado losses caused

2011 CAT losses to surge

($ Billions, 2012 Dollars)

32

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – June 2013*Number of Events (Annual Totals 1980 – June 2013*)

*Through June 30, 2013.Source: MR NatCatSERVICE 33

41

19

121

3

50

100

150

200

250

300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 68 natural disaster events in the

first half of 2013

There were over 150 natural disaster events in the US every

year since 2006. That hadn’t happened in any year before.

34

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.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 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

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

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

35

If They Hit Today, the Dozen Costliest (to Insurers) Hurricanes in U.S. History

Insured Losses,2012 Dollars, $ Billions

*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I.

$40$50 $50 $50

$65

$125

$40$35$25$20$20$20

$0

$20

$40

$60

$80

$100

$120

$140

Sandy*(2012)

Betsy(1965)

Hazel(1954)

Donna(1960)

NewEngland(1938)

Katrina(2005)

Galveston(1915)

Andrew(1992)

south-Florida(1947)

Galveston(1900)

mid-Florida(1928)

Miami(1926)

When you adjust for the damage prior storms could have done if they occurred today, Hurricane Katrina slips to a tie for 6th among the most

devastating storms.

Storms that hit long ago had less property and businesses to damage, so simply adjusting their actual claims for inflation doesn’t capture their

destructive power.Karen Clark’s analysis aims to overcome that.

Investments

36

Investment Performance is a Key Driver of Profitability

36

37

U.S. Treasury Security Yields*:A Long Downward Trend, 1990–2013

*Monthly, constant maturity, nominal rates, through September 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1/3

1/1

99

0

1/3

1/1

99

1

1/3

1/1

99

2

1/3

1/1

99

3

1/3

1/1

99

4

1/3

1/1

99

5

1/3

1/1

99

6

1/3

1/1

99

7

1/3

1/1

99

8

1/3

1/1

99

9

1/3

1/2

00

0

1/3

1/2

00

1

1/3

1/2

00

2

1/3

1/2

00

3

1/3

1/2

00

4

1/3

1/2

00

5

1/3

1/2

00

6

1/3

1/2

00

7

1/3

1/2

00

8

1/3

1/2

00

9

1/3

1/2

01

0

1/3

1/2

011

1/3

0/2

01

2

1/3

1/2

01

3

Recession2-Yr Yield10-Yr Yield

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

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

U.S. Treasury security yields

recently plunged to record lows

37

38

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2012

16.0%

15.2%

15.7%

16.2%

16.3%

29.8%

29.2%

28.8%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

40.4%

31.3%

32.5%

34.1%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

27.6%

15.4%

15.4%

13.6%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

9.8%

9.2%

7.6%

7.6%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%

5.7%16.5%

15.2%

14.4%

16.0%

15.4%

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

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Under 1 year

1-5 years

5-10 years

10-20 years

over 20 years

Sources: SNL Financial; Insurance Information Institute.

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds

(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields.

39

P/C Insurance Industry Financial Overview

39

P/C Net Income After Taxes1991–2013:1H ($ Millions)

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% 2013:Q1 ROAS1 = 9.6%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.7% ROAS in 2013:Q1, 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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$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

4,5

09

$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 13:1H

Net income is up substantially

(+42.4%) from 2012:1H $17.2B

-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

:1H

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:1H*

*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.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%

10 Years

10 Years9 Years

2012: 5.9%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013:1H 8.2%

43

Policyholder Surplus, Quarterly, 2006:Q4–2013:1H

2013:Q1 is estimatedSources: ISO; A.M .Best.

($ Billions)

$487

.1$4

96.6

$512

.8$5

21.8

$478

.5$4

55.6

$437

.1$4

63.0

$490

.8$5

11.5

$540

.7$5

30.5

$544

.8$5

59.2

$559

.1$5

38.6

$553

.8

$583

.5$5

83.5

$586

.9$6

05.0

$614

.0

$570

.7

$566

.5

$505

.0$5

15.6

$517

.9

$350

$400

$450

$500

$550

$600

$650

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

3

12:Q

3

12:Q

4

13:Q

1

13:Q

2

The industry at year-end 2012 had $1 of surplus for every $0.78 of NPW, the strongest claims-paying status in its history.

Up nearly $175 Billion from the 2009:Q1

trough, a new peak

Down $84 Billion from the previous peak,

due to the financial crisis,

CATs

44

Key Takaways

44

45

P/C Insurance Exposures Will Grow With the U.S. Economy Personal lines exposure growth is likely in 2013 Wage and employment growth is also positive and could modestly

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

Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2013-4

Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, severity in some key lines

Industry Capacity Hits a New Record by Year-End 2013 (Barring Meg-CAT)

Investment Environment Is/Remains Challenging Interest rates remain low

Takeaways:P/C Insurance Predictions for 2013-14

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute