The State ofthe P/C Insurance Industry

2010 PAAS Annual ForumSavannah, GAJune 9, 2010

Download at: www.iii.org/presentations

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

The Economic Backdrop

3

Real Quarterly GDP Growth:A Slow Recovery is Forecast

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 5/10; Insurance Information Institute.

2.1

%

-0.7

%

1.5

%

-2.7

%

-5.4

%

-6.4

%

-0.7

%

2.2

%

5.6

%

3.2

%

3.2

%

2.9

%

3.1

%

3.0

%

3.1

%

3.2

%

3.2

%

1.4

%

0.1

%

3.0

%

1.2

%

3.2

%

3.6

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

06:Q

2

06:Q

3

06:Q

4

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

11:1

Q

11:2

Q

11:3

Q

11:4

Q

Personal and Commercial Lines Exposure Bases Have Been Hit Hardand Will Be Slow to Come Back

Real GDP Growth (Annual Rate)

Recession began in Dec. 2007

Steepest drop since Q1:1982

(also -6.4%)

Relatively weak growth is forecast for 2010/11

4

It Seems We Have a RecessionEvery 5-8 Years or So

10 1116

6

168 8

19

50

80

3745

39

24

106

36

58

12

92

120

73

43

138 11 10 8

0

10

20

30

40

50

60

70

80

90

100

110

120

Aug1929

May1937

Feb1945

Nov1948

Jul1953

Aug1957

Apr1960

Dec1969

Nov1973

Jan1980

Jul1981

Jul1990

Mar2001

Dec2007

Month Recession Started

Contraction Expansion Following

* Through June 2009 (likely the “official end” of recession) ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

Average Duration**Recession = 10.4 MosExpansion = 60.5 Mos

Length of Expansions Greatly Exceeds Contractions

Duration (Months)

5

Labor Market Trends

Massive Job Losses Affect the Commercial and Personal Lines

Exposure Bases

6

Unemployment and UnderemploymentRates: Is the Worst Over?

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

May 2010 unemployment rate (U-3) was

9.7%. Peak rate in the last 30

years: 10.8% in Nov - Dec 1982

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

U-6 hit 17.5% in

Oct 2009 but is now 16.6%

January 2000 through May 2010, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising

slightly for 19 months more

Recession began in

December 2007

7

An Uneven Recession:Less Education => Higher Unemployment

13.6%

10.3%

8.7%

6.6%

4.4%

14.0%

9.4%8.1%

6.2%

4.6%

0%

4%

8%

12%

16%

Less than HSDiploma

HS Graduate Some College, No Degree

Associate Degree Bachelor'sDegree or Higher

May 2009 May 2010

Source: US Bureau of Labor Statistics accessed at ftp://ftp.bls.gov/pub/suppl/empsit.cpseea17.txt .

Unemployment Rate (%)

Personal Lines Exposures Should Remain More Stable in Populations with Higher Educational Attainment

8

Unemployment Rate by Gender: The “Mancession” Can Affect Exposure Too

13.1%

8.8% 8.3%

6.0%4.5%

13.9%

11.4%

9.1%

6.8%

4.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Less than HSDiploma

HS Graduate Some College, No Degree

Associate Degree Bachelor'sDegree or Higher

Men Women

Source: US Bureau of Labor Statistics accessed at ftp://ftp.bls.gov/pub/suppl/empsit.cpseea17.txt .

Unemployment Rate (%), May 2010

Higher Male Unemployment Rate Has Had a Significant Impact on Specialty Personal Lines (e.g., watercraft, RVs, campers, motorcycles, snowmobiles, etc.)

9

The Number of Long-termUnemployed is Still Growing

3275

3204

3233

3026

2966

3147

2806

2929

3008

2748

2646

2682

2752

3141

3398

3519

3969

4041

3982

4321

4066

3557

4120

3910

3717

3526

3486

3362

3412

3228

2991

3019

1757

1927

1987

2347

2534

2531

3054

3452

2916

2828

2942

3240

3163

2840

2632

2696

2436

2253

2161

2207

2591

2647

2917

3182

3680

3948

4381

4965

4988

5438

5594

5887

6130

6313

6133

6547

6716

6763

3255

3267

3658

3404

3371

3346

0

4000

8000

12000

16000Less than 5 weeks 5-14 weeks15-26 weeks 27 weeks and over

*Through May 2010; Seasonally adjusted Sources: Bureau of Labor Statistics; Insurance Information Institute.

Mean DurationNov 2008 = 18.9 WeeksMay 2010 = 34.4 Weeks

Number of People(Thousands)

Highest number on record (since 1948)

10

When Might All of the Lost JobsBe Regained? 2016?

Source: Wall Street Journal, October 9, 2009, p. A3

11

Regional Differences Will Significantly Affect P/C Markets

Recovery in Some Areas Will Begin Years Ahead of Others;

Speed of Recovery Will Differ by Orders of Magnitude

12

State Economic Growth Varied Tremendously in 2008

US Bureau of Economic Analysis

Highest Quintile

Fourth Quintile

Third Quintile

Second Quintile

Lowest Quintile

Far West0.6

Rocky Mountain2.2

Southwest1.7

Plains2.0 Great Lakes

-0.4

New England1.0

Mideast1.3

Southeast0.0

US = 0.7

WA2.0

OR1.6

CA0.4

NV-0.6

ID0.0

MT1.8

WY4.4

UT1.4 CO

2.9

AZ-0.6 NM

2.0

TX2.0

OK2.7

KS2.2

NE1.3

SD3.5

ND7.3 MN

2.0

IA2.1

MO1.3

WI0.7

IL0.3

MI-1.5

IN-0.6

OH-0.7

NY1.6

PA1.1

NJ0.6

MD1.3

DE-1.6

DC3.0VA

1.3

WV2.5

KY-0.1

NC0.1

SC0.6

TN0.5

AR0.7

LA0.3

MS1.7

AL0.7

GA-0.6

FL-1.6

AK-2.0

HI0.7

ME1.4

NH1.8

VT1.7 MA

1.9

RI-0.9CT

-0.4

Mountain, Plains States Growing the Fastest

Percent Change in Real GDP by State, 2007–2008

13

Unemployment Rates Vary Widelyby State and Region*

12.0

%11

.6%

11.5

%10

.8%

11.0

%10

.4%

10.6

%10

.5%

9.2%

7.8%

7.2%

6.7%

9.8%

9.0%

9.0%

8.4%

7.5%

12.5

%9.

2%9.

0%8.

1%6.

7%6.

4%

8.4%

6.7%

0%

3%

6%

9%

12%

15%

FL SC

MS

NC AL

GA KY

TN WV AR

VA LA NJ

DE

PA NY

MD RI

MA CT

ME

NH VT

AL HI

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for March 2010, seasonally adjusted.

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

Southeast Mid-Atlantic New England

14

Unemployment Rates Vary Widelyby State and Region* (cont’d)

13.7

%

14.0

%

6.5%

5.0%

4.7%

3.8%

9.2%

10.6

%12

.6%

10.0

%8.

5%

6.9%

10.9

%

7.2%

9.4%

11.2

%

8.0%

7.1%

7.3%

7.1%

9.1%

8.7%

8.3%

6.6%

9.5%

0%

3%

6%

9%

12%

15%

AZ

NM TX OK ID CO

WY UT

MT

NV

CA

OR

WA MI IL O

H IN WI

MO

MN IA KS NE

SD

ND

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for March 2010, seasonally adjusted.

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

Southwest Mountain

Far West

Great Plains

Great Lakes

15

Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing Have Contributed to

Industry’s Job Losses

16

U.S. Employment in the DirectP/C Insurance Industry: 1990–2010*

*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Thousands

460

480

500

520

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

As of Apr. 2010, P/C insurance industry employment was down by 27,700 or 5.6% to 463,400 since the

recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)

17

U.S. Employment in the Reinsurance Industry: 1990–2010*

Thousands

24

28

32

36

40

44

48

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of Apr. 2010, US employment in the reinsurance industry was down by 1,800 or 6.7% to 25,100

since the recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)

18

U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*

Thousands

500

550

600

650

700

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of April 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of Apr. 2010, employment at insurance agencies and

brokerages was down by 49,600 or 7.3% to 630,000 since the

recession began in Dec. 2007 (compared to overall US

employment decline of 7.2%)

19

U.S. Employment in Insurance Claims Adjusting: 1990–2010*

Thousands

40

43

46

49

52

55

58

Jan-

90

Sep

-90

May

-91

Jan-

92

Sep

-92

May

-93

Jan-

94

Sep

-94

May

-95

Jan-

96

Sep

-96

May

-97

Jan-

98

Sep

-98

May

-99

Jan-

00

Sep

-00

May

-01

Jan-

02

Sep

-02

May

-03

Jan-

04

Sep

-04

May

-05

Jan-

06

Sep

-06

May

-07

Jan-

08

Sep

-08

May

-09

Jan-

10

*As of April 2010; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of Apr. 2010, claims adjusting employment was down by 8,500 or 16.3%

to 43,500 since the recession began in Dec. 2007 (compared to overall US

employment decline of 7.2%)

Katrina, Rita, Wilma

Exposure Drivers

20

Economic Obstacles or Pathwaysto Growth in the P/C Insurance

Exposure Base

21

(Millions of Units)

Private Housing Unit Starts, 1990-2011F

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

0

0.5

6 0.6

9

0.9

4

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 10F11F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners InsurersDue to Weak Home Construction Forecast for 2010-2011.

Also Affects Commercial Insurers with Construction Risk Exposure, Surety

Smallest number of starts since records began

in 1959

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is

estimated at about $1.3 billion

Average Square Footage of Completed New Homes in U.S., 1973-2010:Q1

1,66

01,

695

1,64

51,

700

1,72

01,

755

1,76

01,

740

1,72

01,

710

1,72

51,

780

1,78

51,

825 1,90

5 1,99

52,

035

2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12

02,

150

2,19

02,

223

2,26

62,

324

2,32

02,

330

2,34

9 2,43

42,

469

2,52

12,

519

2,43

82,

389

1,500

1,700

1,900

2,100

2,300

2,500

2,700

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: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.

Square Ft

The trend to building larger homes reversed in 2009, affecting exposure growth beyond

the decline in number of units built

Average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions

22

23

16.9

16.5

16.1

13.1

10.3

11.8

13.2

16.9

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 10F 11F

(Millions of Units)

Auto/Light Truck Sales, 1999-2011F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.

Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales;

Gas Prices Could Once Again Become a Factor Too

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for

2010-11 is still far below 1999-2007 average of 17

million units

Sharply lower auto sales will have a smaller effect on auto insurance

exposure level than problems in the housing market will on home insurers

“Cash for Clunkers” generated about $300M in net new personal auto premiums

Unemployment’s Effect on Percent of Uninsured Motorists, 1989-2014F

12%

13%

14%

15%

16%

17%

18%

19%

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

E

20

10

F

20

11

F

20

12

F

20

13

F

20

14

F

3%

6%

9%

12%

Uninsured Motorist Percentage National Unemployment Percentage

Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Blue Chip Economic Indicators (Unemployment data, including forecasts); Insurance Information Institute.

Unemployment% Uninsured

The unemployment rate appears to be closely

correlated with the uninsured motorist

percentage.

In 2010 roughly 18% of motorists are expected

to be driving without insurance as high

unemployment prompts some people

to drop coverage

24

25

Net New Business Formations*1999:Q1-2008:Q4*

14

2220202524

136

2

-1-5 -3

13

2317

126 6

14

2225

1824

3125

36343639

26

14

28

19

3

15

2

-3

-28-32

-48-50

-40

-30

-20

-10

0

10

20

30

40

50

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

Net Business Formations Likely Were Positive Again,at Least in the Second Half of 2009 and into 2010.

*Business “births” minus business “deaths.” Latest data on business “deaths” is for 2008:Q4.Sources: Bureau of Labor Statistics at http://www.bls.gov/news.release/cewbd.t07.htm ; Insurance Information Institute.

Thousands

March-November

2001 recession

2008-2009 recession

In 2008, over 110,000 more businesses

disappeared than started

26

FDIC-Insured Banks AreReducing Credit: 2008, 2009, 2010:Q1

Source: FDIC Quarterly Banking Profile, First Quarter 2010, Table II-A

FDIC-Insured Institutions Had $541.1B (-13.1%) Less in Outstanding Loans in These Three Categories at Year-end 2009 vs. 2008,

and Even Less at End of 2010:Q1

$Billions

$451.5

$1,220.8

$1,916.7

$417.97

$1,187.61

$1,887.37

$590.9

$1,494.0

$2,045.2

$0

$500

$1,000

$1,500

$2,000

$2,500

Construction andDevelopment Secured by

Real Estate

Commercial and Industrial 1-4 Family ResidentialMortgages

2008

2009

2010

Down $139.4B (-13.1%)

Down $273.2B (-18.3%)

Down $128.5B (-6.3%)

April 2010: Many banks are maintaining tight loan standards; some are tightening further; virtually no one loosening

27

Business Fixed Investment

Source: Wells Fargo Securities Economics Group, Monthly Outlook, April 7, 2010

-18.

4% -13.

9%

-15.

0% -11.

0%

-5.0

%

-3.5

%

1.0% 3.

0% 4.5% 5.0%

-0.5

%

-5.0

%

-9.4

%

-25.

9%

-36.

4%

-4.9

%

1.5%

19.0

%

5.7% 6.5% 7.6% 9.2% 10

.3%

9.7%

9.6%

9.3%

6.8%

14.5

%

-0.1

%

-7.2

%

-43.

6%

-17.

3%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

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

Structures Equipment & Software

2008:Q1 to 2011:Q4F

Investment in Structures is forecast to be down in 2010

and low in 2011.

Investment in Equipment &

Software is forecast to be positive in

both 2010 and 2011.

Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)

*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).

-4.4%

-2.0%-1.1%

1.1%

3.7%4.6%

8.5%

3.5%

2.1%

-0.5%

-3.6%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

Recessions in the 1970s and 1980s saw smaller exposure impacts

because of continued wage inflation, a factor not present

during the 2007-2009 recession

The Dec. 2007 to mid-2009 recession

caused the largest impact on WC

exposure in 60 years

(Percent Change)

(All Post WWII Recessions)

Recession Dates (Beginning/Ending Years)

29

Mounting Pressure on Claim Cost Severities?

Inflation Trends:Concerns Over Stimulus Spending

and Monetary Policy

30

Annual Inflation Rates(CPI-U, %), 1990–2011F

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

2.0 1.9

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 10F11F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, May 10, 2010 (forecasts).

There is So Much Slack in the US Economy That Inflation Should Not Be a Concern Through 2010/11, but Depreciation of Dollar is Concern Longer Run

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 have reduced inflationary pressures

WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

2.7%

1.8%

6.9%

3.0% 3.0%3.4%

3.1%3.4%

0%

2%

4%

6%

8%

Overall CPI "Core" CPI HospitalServices

Physicians'Services

DentalServices

PrescriptionDrugs

Medical CareCommodities

Medical CPI

(Percent increase Dec 08 to Dec 09)

Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least

32

Excludes Food and Energy

Inpatient Services Rose 6.7%;

Outpatient Services Rose 7.4%

33

Risks for Insurersif Inflation Is ReignitedRising Claim Severities

Cost of claims settlement rises across the board (property and liability)

Rate InadequacyRates inadequate due to low trend assumptions arising from

use of historical data

Reserve InadequacyReserves may develop adversely and become inadequate

(deficient)

Burn Through on RetentionsRetentions, deductibles burned through more quickly

Reinsurance Penetration/ExhaustionHigher costs risks burn through their retentions more

quickly, tapping into reinsurance more quickly and potentially exhausting their reinsurance more quickly

Financial Strength & Ratings

34

Industry Has Weathered the Storms Well

35

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009p

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

9*

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

*Combined ratio of 101.7 is through Q3:09; 0.36% 2009 impairment rate is III estimate based on preliminary A.M. Best data.Source: A.M. Best; Insurance Information Institute

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08

36

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009

12.2%

3.0%3.3%

3.9%

77.6%

.Source: A.M. Best.

P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses

Are Anticipated in the Industry’s Risk Management Strategy

Despite financial market turmoil and a soft market in

2009, 80.9% of ratings actions by A.M. Best were

affirmed or upgraded; just 6.9% were downgraded

orplaced under review

Affirm – 1,375

Downgraded – 53

Upgraded – 59

Under Review – 69

Other – 216

37

Reasons for US P/C Insurer Impairments, 1969–2008

3.7%4.2%

9.1%

7.0%

7.9%

7.6%

8.1% 14.3%

38.1%

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/In-adequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

P/C Insurance Financial Performance

38

A Resilient Industry in Challenging Times

39

Profitability

Historically Volatile

P/C Net Income After Taxes1991–2009 ($ Millions)

$14,1

78

$5,8

40

$19,3

16

$10,8

70

$20,5

98

$24,4

04 $36,8

19

$30,7

73

$21,8

65

$3,0

46

$30,0

29

$62,4

96

$3,0

43

$28,3

11

-$6,970

$65,7

77

$44,1

55

$20,5

59

$38,5

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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8%

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.3% ROAS for 2009 and 4.4% for 2008. 2009 net income was $34.5 billion and $20.8 billion in 2008 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry profits for full-year 2009 were up sharply

from 2008, but still well below pre-crisis levels

41

ROE: P/C vs. All Industries1987–2009*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.

-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

US P/C Insurers All US Industries

P/C Profitability isCyclical and Volatile

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: 90-95 is Where It’s At Now

Combined Ratio / ROE

* 2009 figure is return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guarantee insurersSource: Insurance Information Institute from A.M. Best and ISO data

97.5

100.6 100.1 100.7

92.6

99.5101.0

7.3%

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*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

Combined ratio of about 100 generated a 6% ROE in 2009, 10%

in 2005 and16% in 1979

P/C Premium Growth(?) Driven Mainly by the

Industry’s Underwriting Cycle, Not the Economy

43

44

Real GDP Growth vs. Real P/CPremium Growth: Modest Association

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 3/10; Insurance Information Institute

4.3

%1

8.6

%2

0.3

%5

.8%

0.3

%-1

.6%

-1.0

%-1

.8%

-1.0

%3

.1%

1.1

%0

.8%

0.4

%0

.6%

-0.4

%-0

.3%

1.6

% 5.6

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.8%

-3.8

%

5.2

%-0

.9%

-7.4

%-6

.5% -1

.5%

1.8

%

-10%

-5%

0%

5%

10%

15%

20%

25%

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

E

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

Real NWP Growth Real GDP

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Real GDP Growth vs. Real P/C (%)

45

-10%

-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

F

Strength of Recent HardMarkets by NWP Growth

(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

During the Great Depression. Expected decline of 1.6% in 2010.

Capital/PolicyholderSurplus (US)

46

47

Policyholder Surplus, 2006:Q4–2010:Q1E

Source: ISO, AM Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$530.0

$505.0$515.6$517.9

$380

$400

$420

$440

$460

$480

$500

$520

$540

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:Q410:Q1?

2007:Q3--Surplus Peaked at $521.8

Declines Since 2007:Q3 Peak

08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)09:Q1: -$84.7B (-16.2%)

09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)

2009:Q4--Surplus was just below the 2007

peak and will likely set a new record in 2010

48

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

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

3.3%

9.6%

6.9%

10.9%

6.2%

13.8%

16.2%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Overthe Past 20+ Years

(Percent)

Investment Performance

49

Investments Are a PrincipleSource of Declining Profitability

Property/Casualty Insurance Industry Investment Gain: 1994–2009P1

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.4$35.1

$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 09P

Investment Gains Fell by 51% In 2008 Due to Lower Yields,Poor Equity Market Conditions. In 2009, the Return of Realized Capital

Losses Helped Offset Lower Investment Income

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)

51

P/C Insurer Net Realized Capital Gains, 1990-2009

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

$2.8

8

$4.8

1

$9.8

9

$9.8

2

$10.8

1

$18.0

2

$13.0

2

$16.2

1

$6.6

3

-$1.2

1

$6.6

1

$9.1

3

$9.7

0

$3.5

2

$8.9

2

-$8.0

0

-$19.8

0

$9.2

4

$6.0

0

$1.6

6

-$25-$20-$15-$10-$5$0$5

$10$15$20

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

Realized Capital Losses Hit a Record $19.8 Billion in 2008Due to Financial Market Turmoil, Followed by an $8.0B Drop in 2009.

This is a Primary Cause of 2008/2009’s Large Drop in Profits and ROE

($ Billions)

52

U.S. Treasury Yields Are Still Quite Low Compared to Pre-Crisis Levels

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

0.11% 0.11% 0.27% 0.37%0.76%

1.00%

1.55%1.87%

2.25%

3.05%2.69%

0.15% 0.16% 0.22% 0.34%

0.76%

1.26%

2.10%

2.75%

3.31%

4.05%4.22%

0%

1%

2%

3%

4%

5%

6%

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

Pre-Crisis (July 2007)

Year-end 2008

Month-end May 2010

Treasury yields for 7-yr notes are above the 1.87% they were 17 months ago,

but still depressed (2.75%!) relative to pre-crisis yields.

The Average Maturity on Bonds in P-C Insurers’ Portfolios Has Remained Steady at About 7.5 Years Through the Last Decade

Sources: Board of Governors of the United States Federal Reserve Bank at http://ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical_main.shtml ; Insurance Information Institute.

53

Distribution of P/C Insurance Industry’s Investment Portfolio

Sources: NAIC; Insurance Information Institute research.

Invested assets totaled $1.214 trillion as of 12/31/08

Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of 12/31/08

Only about 15% of assets were invested in common stock as of 12/31/08

Even the most conservative of portfolios was hit hard in 2008

Portfolio Facts

8.0%14.8%

0.9%1.8%

6.1%

68.4%

Bonds

Common Stock

Real Estate

As of December 31, 2008

Cash and Short-term

Investments

Preferred Stock

Other

54

Underwriting: It Wasn’t the Economy, …

The Underwriting Cycle, Catastrophe Losses

Were the Main Drivers

55

P/C Insurance Industry Combined Ratio, 2001–2009*

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

95.7

99.3101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009*

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

2005 Ratio Benefited from Heavy Use of Reinsurance

Which Lowered Net Losses

Relatively Low CAT Losses, Reserve Releases

56

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 Will Expected to Taper Off in 2010 and Drop Significantly 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.

Underwriting Gain (Loss)1975–2009:Q3*

* Includes mortgage and financial guarantee insurers.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 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09:Q3

The industry “improved” as of 2009:Q3 to an underwriting loss of $3.2 billion, compared to a

loss for all of 2008 of $19.8 billion.

Cumulative underwriting deficit from 1975 through 2009:Q3 is $445B

($ Billions)

58

Number of Years with Underwriting Profits by Decade, 1920s–2000s

0 0

3

54

8

10

76

0

2

4

6

8

10

12

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

* 2000 through 2009. 2009 combined ratio was 100.7 through Q3.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

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

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

59

Catastrophic Loss –Claims Are Trending Adversely

Catastrophic Losses*: Was 2005an Outlier or a Harbinger?

$7.5$2.7$4.7

$22.9

$5.5

$16.9

$8.3$7.4$2.6

$10.1$8.3$4.6

$26.5

$5.9

$12.9

$27.5

$6.7

$26.0

$11.1

$61.9

$9.2

$0

$10

$20

$30

$40

$50

$60

$70

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

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ BillionsIs $25 billion the new

level of expected yearly CAT losses?

Before 2001, CAT losses averaged about $8-10 billion per year.

5.1 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.0 6.2 6.3 6.5 6.6 6.8 7.0 7.1

7.3 7.4 7.5

7.5 7.5

7.6 7.6 7.7 7.8 7.9 8.0

8.2 8.3 8.4

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

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

10F

11F

12F

13F

14F

15F

16F

17F

18F

19F

Source: http://edr.state.fl.us/conferences/population/demographic.htm

Data are from Jan. 26, 2010 Florida Demographic Estimating conference

A Million More Florida Resident Households in the Next Decade?

Millions of Households

In January 2010 the State of Florida forecast

roughly 900,000 more households by 2019 (up 12%). There will be more

businesses, too.

Hurricane Andrew

Hurricane Wilma

62

Estimated Value, in 2007,of Insured Coastal Exposure, by State

(2007, $ Billions)

Sources: AIR Worldwide; I.I.I.

$224.4$191.9

$158.8$146.9$132.8

$92.5$85.6$60.6$55.7$51.8$54.1

$14.9

$479.9$635.5

$772.8$895.1

$2,378.9$2,458.6

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

$522B Increase Since 2004,

Up 27%

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

63

Estimated Value, in 2010,of Insured Coastal Exposure

$ Billions

Source: AIR Worldwide’s 2007 estimates, assumed to grow by 5% per year increased rebuilding cost; assumes no new structures built in 2008-2010

$259.8$222.1

$183.8$170.1$153.7

$107.1$99.1

$70.2$64.5$60.0$62.6

$17.2

$555.5$735.7

$894.6$1,036.2

$2,753.9$2,846.1

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

If no new structures were built after 2007, and if the cost of re-building a damaged

structure—and the insured value for those structures—grew by 5% per year, the total insured value would now be about $10.3 trillion. Florida, the state with the most

exposure, would have about $2.85 trillion exposed to loss.

64

Sinking of Deepwater Horizon Platform and Gulf of Mexico Oil Spill

65

Insurance Implications of Sinking of Deepwater Horizon Platform and Oil Spill

Insurance losses from the explosion and sinking of the Deepwater Horizon offshore oil platform will be significant

One of the Largest Losses Ever for Global Offshore Energy Insurance and Reinsurance Markets

Early Loss Estimates Put the Insured Loss in Excess of $1B to $1.25B*

Includes $560 million as replacement cost of sunken oil platform

Loss Appears to Be Well Syndicated With a Global Spectrum of Insurers and Reinsurers Sharing in the Losses

Significant retentions/self-insurance may be in play

66

Deepwater Horizon Oil Rig/Spill Loss:6 Types of Coverage That Might Apply

Source: http://www.iii.org/insuranceindustryblog/; http://www.iii.org/articles/offshore_energy_facilities_insurance_considerations.html

Physical Damage: covers physical damage or loss to a company’s offshore property and equipment, including offshore fixed platforms, pipelines and production and accommodation facilities.

Business Interruption/Loss of Production Income: covers energy businesses against loss due to temporary interruption in oil/gas supply from an offshore facility as a result of physical loss or damage to an offshore facility.

Operators’ Extra Expense (Control of Well): covers costs incurred by energy businesses when regaining control of a well after a “blowout”. Might include expenses incurred in restoring or re-drilling well after blowout; seepage and pollution liability coverage to pay third party bodily injury, damage to and loss of third party property.

67

Deepwater Horizon Oil Rig/Spill Loss:6 Types of Coverage That Might Apply (cont’d)

Source: http://www.iii.org/insuranceindustryblog/; http://www.iii.org/articles/offshore_energy_facilities_insurance_considerations.html

Offshore Construction: covers the many different risks energy businesses face during construction projects, from project inception through completion and beyond.

Liability: Comprehensive general liability: covers claims an energy business is legally obligated to pay as a result of bodily injury or property damage to a third party. Workers compensation/employers liability: covers energy businesses for losses from injury or death of employees.

Environmental/Pollution Liability: covers bodily injury, property damage, and clean up costs as a result of a pollution incident from a designated site.

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