Trends, Challenges and Opportunities in the Personal Auto

Insurance Industry

Robert P. Hartwig, Ph.D., CPCUClinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ♦ University of South CarolinaRobert.Hartwig@moore.sc.edu ♦ 803.777.6782

March 16, 2018

2

Presentation Overview P/C Industry Financial Overview and Outlook Claim trends as a driver of underwriting performance

Drivers of Personal Lines Growth Price Exposure

Role of the Economy and Claiming Behavior

Personal Lines Growth Drivers

Personal Auto Claim Trend Analysis

Personal Auto Underwriting, Loss Ratio and Profitability

Auto Insurer Disruptors and InsurTech

3

P/C Insurance Industry Financial Overview

CATS Claims, Non-CAT Underwriting Losses in Personal and Commercial Auto

Impacted Insurer Balance Sheets

Industry Remains Strong, But Major Differences Between Personal and Commercial Lines Growth Prospects

3

P/C Industry Net Income After Taxes1991–2017E 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 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015 ROAS = 8.4% 2016 ROAS = 6.2% 2017E ROAS =4.2%*

•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2016E is annualized figure based actual figure through Q3 of $31.8B.Sources: A.M. Best, ISO; USC RUM Center estimate (2017 based on actual NIAT of $22.352 though Q3 and ROAS of 4.2%).

$14,

178

$5,8

40$1

9,31

6$1

0,87

0 $20,

598

$24,

404 $3

6,81

9$3

0,77

3$2

1,86

5

$3,0

46$3

0,02

9

$62,

496

$3,0

43

$35,

204

$19,

456 $3

3,52

2$6

3,78

4$5

5,87

0$5

6,82

6$4

2,60

9$2

9,80

3

$38,

501

$20,

559

$44,

155

$65,

777

-$6,970

$28,

672

-$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 14 15 16 17E

Net income fell sharply in 2017

as high CAT losses took

their toll

$ Millions

-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 14 15 16 17*

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2017:Q3

*Est. for 2017 based on actual ROAS of 4.45 through Q2; Profitability = P/C insurer ROEs. 2011-16 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, A.M. Best, Conning, USC RUM Center estimates.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

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

9 Years

ROEs in 2017 plunged to their lowest levels since

2001 and 9/11. This creates extreme pricing pressure.

ROE

1975: 2.4%

2013 9.8%

2016 6.2%

2015: 8.4%

2017E 4.2%

6

ROE: Property/Casualty Insurance by Major Event, 1987–2017E

*2017 Estimate based on actual ROAS through Q3 of 4.2% with USC Center for Risk and Uncertainty Management estimate for the full year.

Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; USC RUM Center.

-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 10 11 12 13 14 15 16 17*

P/C Profitability Is Influenced Both by

Cyclicality and Volatility

Hugo

Andrew, Iniki Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Harvey, Irma, Maria,

CA Wildfires

7

P/C Insurance Industry Combined Ratio, 2001–2017:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.; 2017 (est.) based on actual 104.1 through Q3 (Q3 combined ratio alone was 110.7). Sources: A.M. Best, ISO (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 16, 2016.

95.7

99.3101.1

106.5

102.5

96.4 97.0 97.8100.7

104.1101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premiums Relatively

Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

Cyclical Deterioration

Sharply higher CATs are driving

large underwriting losses and

pricing pressure

Personal Lines Combined Ratio: 2006–2017E

93.9 97

.6

104.

7

102.

6

98.3 99.4 10

0.7

102.

5

103.

5

102.

7 107.

8

102.

6

80

85

90

95

100

105

110

06 07 08 09 10 11 12 13 14 15 16 17E

Personal Lines Underwriting Losses Rose in 2017 Due to Record CATs and Adverse Auto Severity

Source: A.M. Best (2006-2016); USC RUM (2017E using actual 9 mo. YTD combined ratio of 102.8). 8

109.

411

0.2

118.

810

9.5 11

2.5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

491

.194

.510

4.4

100.

7 103.

8 107.

310

5.4

96.3

96.0

95.1

99.1

106.

2

102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

125

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 1617

E

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

*2007-2012, 2017 figures exclude mortgage and financial guaranty segments. 17E = actual 9 mo. YTD figure of 106.2.Source: A.M. Best (1990-2016); ISO (2017E).

Commercial Lines Combined Ratio, 1990-2017F*

Commercial lines underwriting performance deteriorated

materially in 2017 as record CATs. diminishing prior year reserves,

rising loss cost trends and pricing pressure in some lines are

pushing combined ratios higher

9

11

CATS Eat Cars Too!Catastrophe Loss Update:

Major Driver of Rate Pressure

2017 Was One of the Costliest Years Ever for US Insurers:

Hurricanes Harvey, Irma and Maria, California Wildfires Exact a Huge Toll

11

12

$13.

0$1

1.3

$3.9

$14.

8$1

1.9

$6.3

$35.

8$7

.8 $16.

8$3

4.7

$10.

9$7

.7$3

0.1

$11.

8$1

4.9

$34.

6$3

6.1

$13.

1$1

5.5

$15.

2$2

1.6

$77.

0

$75.7

$14.

4$5

.0 $8.2

$38.

9$9

.1$2

7.2

$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 14 15 16 17*

U.S. Insured Catastrophe Losses, 1989 – 2017 YTD*

*As of Dec. 31, 2017. Stated in 2017 dollars. Excludes NFIP losses.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

2017 is likely to become the second costliest year

ever for insured CAT losses in the US($ Billions, $ 2015)

12

13

Top 10 US Catastrophe Losses of 2017,by Insured Loss

(Insured Losses, 2017 Dollars, $ Billions)*

$7.3

$15.9$18.0

$21.9

$1.9$1.6$1.5$1.4$1.3$1.0$0

$5

$10

$15

$20

$25

June Hailstorm March Storms FebruaryStorms

March Storms March Storms May ColoradoStorm

CaliforniaWildfires

HurricaneHarvey

Hurricane Irma Hurricane Maria

YTD insured CAT losses in the US totaled $72 billion by late

2017, the second costliest year on record, led by Hurricanes

Maria, Irma and HarveyNot all insured losses in 2017

were due to hurricanes.

More than $15B in other losses occurred from coast-to-coast.

*As of Nov. 14, 2017.Sources: PCS; Insurance Insider: http://www.insuranceinsider.com/-1270818/9.

14

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1997–20161

0.2%2.0%7.0%

5.9%

6.7%

39.9%

38.2%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2016 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $161.1

Fires (4), $8.4

Events Involving Tornadoes (2), $168.1

Winter Storms, $28.2

Terrorism, $25.0

Other Wind/Hail/Flood (3), $29.7

Other (5), $0.8

Wind losses, by far, cause the most

catastrophe losses, even if hurricanes/TS

are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1997-2016

totaled $421.2B, an average of $21.1B per year or $1.76B

per month

Winter storm losses were much above average in 2014/15 pushing

this share up

INVESTMENTS: THE NEW REALITY

15

Investment Performance is a Key Driver of Insurer Profitability

The “Trump Bump” Has Lifted Stock Markets and Interest Rates

Will the Gains Help Insurers?15

Property/Casualty Insurance Industry Investment Income: 2000–2017E*

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3 $46.4 $47.2 $46.3 $47.2

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E*

Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.7%) increase in 2015—

though 2016 experienced another decline. Up ~2% in 2017.1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute.*2017 estimate based on annualized $35.4B actual figure through Q3 2017.

($ Billions) Investment earnings in 2017E were still ~14% below

their 2007 pre-crisis peak

Net Investment Yield on Property/ Casualty Insurance Invested Assets, 2007–2017E*

4.4

4.0

4.6 4.5

3.7 3.83.7

3.43.7

3.2 3.1 3.0

4.6

4.23.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 have pushed up some yields, albeit quite modestly. Shrinking of Fed’s balance sheet should help too in 2018

and beyond.Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017estimate is based on ISO data through Q3 2017.

(Percent)

Investment yield in 2017 were down about 160

BP from pre-crisis levels

19

Brief P/C Insurance Growth Overview and Outlook

Drivers of Growth in 2018

Economic Growth Fuels Exposure & Record CAT Losses Are Pressuring Rates

Price Competition Remains Rational While Others Looks Towards M&A

19

20

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

18F

Net Premium Growth (All P/C Lines): Annual Change, 1971—2018F(Percent)

1975-78 1984-87 2000-03

*Q3:2017 over Q3:2016. Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-16).

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.

2018F: 4.5%2017:Q3: 4.1%

2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

Outlook2017E: 4.1%2018F: 4.5%

Y-o-Y Growth Rates, Direct Premiums Written, Commercial vs. Personal Lines,

2012:Q4 - 2017:Q3

0%

1%

2%

3%

4%

5%

6%

7%

12:Q

1

12:Q

212

:Q3

12:Q

4

13:Q

113

:Q2

13:Q

3

13:Q

414

:Q1

14:Q

2

14:Q

3

14:Q

415

:Q1

15:Q

2

15:Q

315

:Q4

16:Q

1

16:Q

216

:Q3

16:Q

4

17:Q

117

:Q2

17:Q

3

Personal LinesCommercial Lines

Sources: NAIC, via SNL Financial; ISO; Insurance Information Institute calculations.

Since 2014, personal lines Direct Premiums Written have generally grown faster than commercial lines DPW, and that growth has been less volatile.

Personal Lines growth is more

than 3 times that of

Commercial Lines

THE ECONOMY

25

The Strength of the Economy Will Greatly Influence Growth in Insurers’ Exposure

Base Across Most Lines

Claiming Behavior Is Influenced by the Economy as Well

25

26

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/18; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-0.9

%4.

6%4.

3%2.

1%2.

0% 2.6%

2.0%

0.9%

0.8% 1.

4%3.

5%2.

1%1.

2%3.

1%3.

2%2.

5%2.

5% 3.1%

2.9%

2.8%

2.5%

2.4%

2.2%

2.0%

-8.9%

4.5%

1.4%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

08:1

Q08

:2Q

08:3

Q08

:4Q

09:1

Q09

:2Q

09:3

Q09

:4Q

10:1

Q10

:2Q

10:3

Q10

:4Q

11:1

Q11

:2Q

11:3

Q11

:4Q

12:1

Q12

:2Q

12:3

Q12

:4Q

13:1

Q13

:2Q

13:3

Q13

:4Q

14:1

Q14

:2Q

14:3

Q14

:4Q

15:1

Q15

:2Q

15:3

Q15

:4Q

16:1

Q16

:2Q

16:3

Q16

:4Q

17:1

Q17

:2Q

17:3

Q17

:4Q

18:1

Q18

:2Q

18:3

Q18

:4Q

19:1

Q19

:2Q

19:3

Q19

:4Q

Demand for Insurance Should Increase in 2018-19 as GDP Growth Continues at a Steady and Perhaps Accelerating Pace and Gradually

Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in Dec, 2007

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

2018 GDP forecasts were revised upwards by ~0.4%

due to tax reform, but effects my wane in 2019

First consecutive

quarters of 3%+ GDP growth since 2014

28

Consumer Confidence Index:Jan. 1987 – Dec. 2017

Source: The Conference Board; Wells Fargo Research.

Outlook: Consumers are optimistic about the future, which is consistent with expectations for stronger economic growth (consumers account for nearly 70% of all spending in the economy). Should positively influence

business investment.

The Conference Board’s Consumer Confidence Index stood at 122.1 in Dec., close to its

post-recession high

29

16.9

16.5

16.1

13.2

10.4

11.6 12

.714

.4 15.5 16

.4 17.4

17.5

17.1

17.0

16.7

16.7

16.7

16.7

16.9

16.9

16.617

.117.5

17.8

17.4

910111213141516171819

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18F 19F 20F21F 22F 22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2023F

New auto/light truck sales fell to the lowest level since the

late 1960s. Forecast for 2014-15 is still below 1999-2007 average of 17 million units,

but a robust recovery is well underway.

Job growth and improved credit market conditions

boosted auto sales to near record levels in

recent years

Truck, SUV purchases remain strong but have slumped a bit

Yearly car/light truck sales are slowing slightly, as demand tapers following the recovery from the recession. PP Auto premium might

grow by 3.5% - 5%.

Sales have returned to pre-

crisis levels

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (1/18 for 2018-19; 10/17 for 2019-23F; Insurance Information Institute.

30

(Millions of Units)

New Private Housing Starts, 1990-2023F

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1.85 1.

96 2.07

1.80

1.36

0.91

0.55 0.59 0.61

0.78 0.

92 1.00 1.

11 1.17 1.20 1.

27 1.33 1.

40 1.43 1.45 1.48

1.351.

461.

291.

201.

011.

19

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18F19F20F21F22F23F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (1/18 for 2018-19; 10/17 for 2019-23F; Insurance Information Institute.

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

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

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

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, still-low mortgage

rates and demographics should continue to stimulate new home

construction for several more years

31

US Unemployment Rate Forecast4.

5%4.

5% 4.6% 4.

8% 4.9% 5.

4%6.

1%6.

9%8.

1%9.

3% 9.6% 10

.0%

9.7%

9.6%

9.6%

8.9% 9.

1%9.

1%8.

7%8.

3%8.

2%8.

0%7.

8%7.

7%7.

6%7.

3%7.

0%6.

6%6.

2%6.

1%5.

7%5.

6%5.

4%5.

2%5.

0%4.

9%4.

9%4.

9%4.

7%4.

7%4.

4%4.

3%4.

1%4.

0%4.

0%3.

9%3.

8%3.

8%3.

8%3.

8%3.

7%

9.6%

4%

5%

6%

7%

8%

9%

10%

11%

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

16:Q

116

:Q2

16:Q

316

:Q4

17:Q

117

:Q2

17:Q

317

:Q4

18:Q

118

:Q2

18:Q

318

:Q4

19:Q

119

:Q2

19:Q

319

:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/18 edition); Insurance Information Institute.

2007:Q1 to 2019:Q4F*

Unemployment forecasts have been revised modestly downwards. Optimistic

scenarios put the unemployment as low as 3.6 by Q4 2018.

Jobless figures have been revised

downwards for 2018/19

The Nov/Dec. 2017

unemployment rate was 4.1%, a 17-year low

32

Personal Lines Growth Drivers

Rate and Exposure are Both Presently Important

Growth Drivers

33

Top Growth Factors: Personal Lines Rate: Favorable rate trends in both auto and home Adverse severity trends are pressuring personal auto

Record CAT losses in 2017 will further pressure comprehensive

Economic Strength: Economic growth, supported by low unemployment, rising consumer confidence are supporting strength in new auto sales, new home construction, tax cuts

Household Formation: Millennials are finally becoming car and home buyers in larger numbers, driving exposures upward

High Net Worth Consumers: This segment has seen consistent (and profitable) growth as the “wealth effect” grows

Driving More: Americans are behind the wheel more than ever

Market Discipline: Major personal lines insurers remain generally price disciplined

34

Monthly Change in Auto Insurance Prices, 1991–2018*

*Percentage change from same month in prior year; through Feb. 2018; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Cyclical peaks in PP Auto tend to occur roughly every 7-10 years (early 1990s,

early 2000s, early and late 2010s)

“Hard” markets often tend to occur during recessionary

periods

Last pricing peak occurred in late

2010 at 5.3%, falling to 2.8% by Mar. 2012

Feb. 2018 reading of 9.7% is up from 7.6%

a year earlier. Current rate trend is strongest

since 2002-2003.

35

Personal Auto Insurance: Key CPI Cost Component Changes: 2018 vs. 2017*

Source: US Bureau of Labor Statistics; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

4.9% 4.4%

2.1%2.2%

9.7%

2.7%

0.1% 0.1%0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Ove

rall C

PI

Mot

or V

ehic

leIn

sura

nce

Mot

or V

ehic

leBo

dy W

ork

Mot

or V

ehic

leR

epai

rs

Mot

or V

ehic

lePa

rts

Out

patie

ntH

ospi

taliz

atio

n

Inpa

tient

Hos

pita

lizat

ion

Pres

crip

tion

Dru

gs

* February 2018 vs. February 2017.

Feb. 2018 reading of 9.7% is up from 7.6%

a year earlier. Current rate trend is strongest

since 2002-2003.

Hospitalization costs continue to

drive severity

36

Personal Auto Insurance: Key CPI Cost Component Changes: 2008 – 2017

Source: US Bureau of Labor Statistics; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

3.8%

30.6%

13.8%

54.3%

22.8%

9.5%5.4%

0%

10%

20%

30%

40%

50%

60%

Ove

rall

CPI

Mot

orVe

hicl

eIn

sura

nce

Mot

orVe

hicl

eBo

dy W

ork

New

Vehi

cles

New

Car

s

Use

d C

ars

Med

ical

Car

e Ite

ms

The price of auto insurance increased by

nearly four times the overall pace of inflation

from 2008-2017 as frequency and severity trends deteriorated as

the economy recovered and vehicles repair and

medical costs rose

37

$119

.7

$128

.0 $139

.7 $151

.2

$159

.6

$158

.5

$157

.2

$160

.1

$163

.3

$168

.1

$174

.9

$183

.5

$192

.5 $206

.6 $220

.0 $234

.0

$160

.3

$159

.6

$157

.3

$100

$120

$140

$160

$180

$200

$220

$240

$260

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E 18F

PP Auto premiums written continue to recover from a period of flat growth attributable to the weak economy impacting new vehicle sales, car choice, and increased

price sensitivity among consumers

Sources: A.M. Best (1990-2016); USC RUM (2017F-2018F).

Private Passenger Auto InsuranceNet Written Premium, 2000–2018F

$ Billion

PPA NWP volume in 2017 was up an estimated $62.8B or 39.9% since the

2009 trough; By 2017 the gain is expected to be $76.8B or 48.9%

PPA will generate $10B - $14B in new premiums annually

through 2018

Direct Premiums Written: Pvt. Passenger Auto Percent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

59

.8

51

.6

48

.5

45

.6

42

.8

42

.8

41

.6

41

.1

40

.6

40

.4

40

.2

35

.5

33

.3

32

.7

32

.6

32

.2

32

.2

31

.7

30

.8

30

.0

29

.5

29

.3

29

.3

29

.0

28

.8

28

.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

TX CO ND MI OK SC GA UT SD FL NE TN OR WI LA AL IA US MO KY DE KS NC NY ID IN

Top 25 States

Direct Premiums Written: Pvt. Passenger AutoPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

28

.6

27

.9

26

.8

26

.7

26

.5

26

.2

26

.0

26

.0

25

.9

24

.5

24

.5

24

.3

22

.6

22

.6

22

.3

22

.1

21

.6

21

.6

19

.0

18

.2

15

.7

14

.1

13

.9

13

.7

10

.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

VA AR MT DC WA NJ RI MN MD MS CA OH WY IL NV MA AZ NM CT PA NH VT AK WV ME

Bottom 25 States

Direct Premiums Written: Commercial AutoPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

80

.7

42

.0

30

.7

28

.0

26

.1

23

.8

22

.3

21

.6

20

.0

18

.6

16

.4

16

.0

15

.6

15

.3

15

.0

14

.6

14

.4

13

.5

13

.2

12

.6

12

.5

12

.4

12

.2

12

.2

11

.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

ND TX NE DC MI KS OK IL NY IA AR MT CA CO MN WA US GA MO FL TN PA LA WI KY

ND’s energy boom has fueled growth

in every line

Top 25 States

Direct Premiums Written: Commercial AutoPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

10

.7

9.7

8.8

8.7

8.3

8.0

7.6

7.0

7.0

6.2

5.5

5.4

4.0

3.0

2.1

1.0

-0.5

-1.9

-2.6

-3.9

-4.3

-5.8

-6.1

-8.3

-21

.3

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

ID NJ MS OH OR ME NV MA VA UT CT SC MD NC NM WY NH WV RI AZ VT AL AK HI SD

Bottom 25 States

Auto Average Expenditure 2015: Highest 25 States

Sources: NAIC via SNL Financial; Insurance Information Institute.

1,2

65

.7

1,2

34

.8

1,2

31

.8

1,2

31

.4

1,1

90

.4

1,1

85

.3

1,1

48

.0

1,1

45

.7

1,0

58

.5

1,0

48

.6

1,0

16

.8

98

5.4

93

4.2

89

6.5

88

9.0

88

4.2

87

8.2

87

2.4

85

7.4

85

5.3

85

3.5

84

3.9

84

1.5

82

8.0

82

7.3

9.0

0.0

250.0

500.0

750.0

1,000.0

1,250.0

1,500.0

NJ NY LA MI DC FL RI DE MA CT MD NV TX GA US WA PA AK CO WV SC AZ CA OR MS OK

Auto Average Expenditure 2015: Lowest 25 States

Sources: NAIC via SNL Financial; Insurance Information Institute.

80

3.6

4

80

1.9

7

78

7.7

4

78

4.1

0

77

5.0

3

76

4.7

2

76

2.5

6

75

0.8

5

74

5.0

4

73

7.5

9

73

6.4

3

72

2.8

9

70

2.5

9

69

8.4

5

69

2.5

0

68

1.5

4

68

0.1

8

66

6.2

4

66

4.8

1

65

6.6

4

65

5.3

7

63

7.5

4

61

7.7

3

61

5.7

8

59

9.0

3

9.0

0.0

250.0

500.0

750.0

1,000.0

IL KY MN UT NH HI NM VA MO TN AR AL OH KS MT NE VT IN WI WY NC ND ME SD IA ID

44

Homeowners InsuranceNet Written Premium, 2000–2018F

$45.8$49.5

$52.2$54.8 $55.2

$61.1$63.5

$66.9$71.9

$77.0$79.5 $80.2 $81.5 $82.7

$57.5$56.2

$32.4

$40.0

$35.2

$30$35$40$45$50$55$60$65$70$75$80$85$90$95

$100

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E 18F

Sources: A.M. Best; USC RUM Center.

$ Billions Homeowners insurance NWP continues to rise (up 152% 2000-2017E) despite very little unit

growth during the real estate crash. Reasons include rate increases, especially in coastal

zones, ITV endorsements (e.g., “inflation guards”), compulsory for mortgaged properties

and resumption of home building activity

The Homeowners line will generate about

$1.5B in new premiums annually through 2018

Direct Premiums Written: Homeowners MPPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

85

.7

82

.9

82

.0

78

.7

77

.9

75

.0

74

.3

69

.0

68

.4

66

.7

66

.3

65

.1

65

.1

63

.3

63

.0

62

.2

61

.9

55

.5

55

.5

53

.4

52

.3

51

.9

50

.8

50

.1

49

.6

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

SD OK CO NE ND WY MT MN TN GA KS MO AR TX IA KY WI DE ID NM IN UT OH SC NC

Top 25 States

Direct Premiums Written: Homeowners MPPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

47

.9

47

.0

46

.4

45

.5

45

.2

44

.9

43

.3

42

.4

42

.0

41

.0

40

.9

40

.3

39

.3

38

.9

38

.2

37

.4

34

.3

33

.8

31

.7

30

.3

27

.2

26

.8

18

.9

17

.5

17

.4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

CT RI VA ME NJ AL MS WA MD MA US NH PA WV OR LA AZ NY DC AK MI VT CA HI NV

Bottom 25 States

47

State of the Personal Lines Market

Auto Frequency and Severity Are an Immediate Challenge

Homeowners Majorly Impacted by CATs in 2017

47

48

Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2016*

*Latest available.**Excludes 1992, the year of Hurricane Andrew. If 1992 is included the resulting homeowners RNW is 2.2%Sources: NAIC; Insurance Information Institute.

-10%

-5%

0%

5%

10%

15%

20%

25%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

US All LinesUS HomeUS PP Auto

(Percent)Average RNW: 1990-2016*

All P-C Lines: 7.7% PP Auto: 7.6%

Homeowners: 4.9%**

Homeowners is Now Outperforming Pvt.Pass. Auto and P-C Industry as a Whole. HO Volatility is Associated Primarily With Coastal Exposure Issues

Excluding 1992’s Hurricane Andrew

Return on Net Worth: US Personal Auto, 2005-2016

0.7%

13.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Personal Fortune 500

Rising claim costs has been a factor in keeping auto insurer

ROEs quite low

49

Auto Insurance Profitability Remains Well Below Pre-Crisis Levels (12% vs. ~1%) and Far Below the Fortune 500 (13% vs. ~1%)

.SOURCE: National Association of Insurance Commissioners.

0%

2%

4%

6%

8%

10%

12%

14%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

U.S. PP Auto

Return on Net Worth for Private Passenger Auto Insurance: U.S., 2000–2016

Source: NAIC via SNL Financial; Insurance Information Institute.

Average 2000–2016U.S.: 5.7%

Private Passenger Auto Combined Ratio: 1993–2017E

101.

710

1.3

101.

310

1.0

109.

510

7.9

104.

298

.494

.395

.195

.5 98.3 10

0.2

101.

310

1.0

102.

010

2.1

101.

610

2.3

104.

610

6.3

106.

5

99.5 10

1.1

103.

5

80

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

Private Passenger Auto Underwriting Performance Is Showing the Strains of Rising Frequency (and Severity) Trends in Many States

51Sources: A.M. Best (1990-2016); USC RUM Center (2017E).

Homeowners Insurance Combined Ratio: 1990–2017E

113.

011

7.7

158.

411

3.6

101.

0 109.

410

8.2

111.

4 121.

710

9.3

98.2

94.4 10

0.3

89.0 95

.611

6.6

105.

810

6.9

122.

310

4.1

90.4

92.4

91.9

93.2

104.

0118.

411

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

1

Homeowners Performance Had Improved Markedly Since 2011/12’s Large Cat Losses…until 2017’s Record

Catastrophe Loss Activity.

52

Hurricane Ike

Hurricane Sandy

Record tornado activity

Hurricane Andrew

Sources: A.M. Best (1990-2016); USC RUM Center (2017E).

Hurricanes Harvey, Irma,

Maria, CA Wildfires

Commercial Auto Combined Ratio: 1993–2017F

112.

1

112.

0

113.

0

115.

9

102.

7

95.2

92.9

92.1

92.4 94

.1 96.8 99

.1

97.8

103.

4

106.

8

106.

7

103.

3 108.

8

110.

4

109.

9

118.

1

115.

7

116.

2

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17F

Commercial Auto Results Are Challenged as Rate Gains Have Yet to Fully Offset Adverse Frequency and Severity Trends

53Sources: A.M. Best (1990-2016); USC RUM Center (2017E).

54

Change in Commercial Rate Renewals, by Line: 2017:Q3

Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

0.4% 0.4% 0.7% 0.9%

7.3%

-2.3%-0.8% -0.7% -0.4%

0.1% 0.1%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Wor

kers

Com

p

Gen

eral

Liab

ility

Cyb

er

Um

brel

la

Sure

ty

Busi

ness

Inte

rrupt

ion

Con

stru

ctio

n

D&O EP

L

Com

mer

cial

Prop

erty

Com

mer

cial

Auto

Commercial Property, Business Interruption

will need to reflect record CAT losses and

pressure from reinsurance markets

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

Commercial Auto was only major line with materially positive renewals in 2017

55

Claim Trends in Private Passenger Auto Insurance

Rising Frequencies and Severities in Many Coverages

Will that Pattern Be Sustained?

Passenger Vehicle Collision Coverage Insurance Losses by Vehicle Type, 2014-2016 Model Years

8.3%

6.4% 6.5%7.4%

$5,292

$5,210 $5,203

$5,256

$5,000

$5,100

$5,200

$5,300

$5,400

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Passenger Cars &Minivans

Pickups SUVs All

Frequency Severity

Cars and minivans have the highest collision claim frequencies and severities

56.SOURCE: Highway Loss Data Institute.

A Half Century-Plus of Auto Insurance:Frequency vs. SeverityIn the Long Run, Frequency Falls. Severity Increases.

*Four quarters ending in Q3:2017Sources: Insurance Institute for Highway Safety, Insurance Services Office, Insurance Information Institute.

Frequency Severity

7.92

2.61

4.22

1.23

3.57

0.91

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Property Damage Bodily Injury

Cla

ims

per

10

0 I

nsu

red

Veh

icle

s

$183$1,143$1,288

$7,553

$3,673

$16,007

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

PropertyDamage

Bodily Injury

Cla

im S

ever

ity

1963 1988 2017*

58

Bodily Injury: Severity Trend Is Up, Frequency Decline Returning?

2.1% 1.7%3.6%

1.8%

4.3%5.6%

7.6%

-5.4%-3.8% -4.0% -4.2%

-2.2%

0.0%

-1.1%

3.4%

0.0%

-2.2%

3.0%2.0%

5.9%5.7%4.7%

2.9%1.1%

0.0% 0.0%

-8%-6%-4%

-2%0%2%4%

6%8%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Severity Frequency

Annual Change, 2005 through 2017*

BI Severity Trend is a Major Cost Driver

*2017 figure is for the 4 quarters ending 2017:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

59

Property Damage Liability: Severity Up and Frequency Flat

1.8% 1.9%

4.1%3.5%

6.3% 6.0%

4.2%

-1.6%

-3.5% -3.4%

0.6% 0.6%

-0.3%

1.4% 1.4%0.8%

-1.1%

2.9%3.6%

2.0% 2.0%

-0.4%

0.4%0.9% 1.2%0.3%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Severity Frequency

Annual Change, 2005 through 2017*

Severity/Frequency Trends Have Been Volatile, But Rising Severity since 2011 Is a Concern

*2017 figure is for the 4 quarters ending 2017:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

60

PIP: Severity Trend Is Up, Frequency Decline Returning?

-6.5%

-0.8%

10.9%

-2.1% -2.8%

6.2%

1.8%3.3%3.2%

-1.2%

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

10%12%

2013 2014 2015 2016 2017*

Severity Frequency

Annual Change, 2013 through 2017*

No-Fault (PIP) Trends Have Been Volatile

*2017 figure is for the 4 quarters ending 2017:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

61

Collision Coverage: Severity & Frequency Trends Are Both Higher in 2017*

2.8%1.3%

4.2%

1.4%

5.7% 5.1%

-0.1%

-1.8%

-3.6%

2.5%

-2.4% -1.8%

4.4%

1.2% 1.2%0.3%

3.9%3.1%

0.1% 0.5%

-2.3%

-0.1%-1.4%-0.5%

0.9%2.3%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Severity Frequency

Annual Change, 2005 through 2017*

The Recession, High Fuel Prices Helped Temper Frequency and Severity, But this Trend Has Clearly Reversed, Consistent with

Experience from Past Recoveries*Four quarters ending with 2017 Q3. Source: ISO/PCI Fast Track data; Insurance Information Institute

62

Comprehensive Coverage: Frequency and Severity Trends Are Volatile

15.4% 15.3%

-14.6%

6.5%

-1.3%

21.6%

10.7%

-9.8%-6.3%

1.3%5.8%

-8.9%-5.6%

2.1%

-1.1%

15.5%

-1.4% -1.5%

12.6%

-8.1%-5.9% -2.1%

3.5%

-3.1%

1.8%6.2%

-20%-15%-10%

-5%0%

5%10%15%20%25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Severity Frequency

Annual Change, 2005 through 2017*

Weather Creates Volatility for Comprehensive Coverage. Comprehensive Losses Were Up 24.9% in Q3:2017 Due Largely to

Hurricanes Harvey and Irma

Severe weather is a principal cause of the spikes in both

frequency and severity

*2017 figure is for the 4 quarters ending with 2017:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

63

Loss Ratio Analysis:Private Passenger Auto

Insurance

Lost Ratios Have Generally Risen Over the Past Several Years

Private Passenger Auto Combined Ratio: 1993–2017E

101.

710

1.3

101.

310

1.0

109.

510

7.9

104.

298

.494

.395

.195

.5 98.3 10

0.2

101.

310

1.0

102.

010

2.1

101.

610

2.3

104.

610

6.3

106.

5

99.5 10

1.1

103.

5

80

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

Private Passenger Auto Underwriting Performance Is Showing the Strains of Rising Frequency (and Severity) Trends in Many States

64Sources: A.M. Best (1990-2016); USC RUM Center (2017E).

US Pvt. Passenger Auto Net Combined Ratio, 2005-2016

95.1%

95.6%

98.3%

100.2%

101.3%

101.0%

102.0%

102.1%

101.6%

102.3%

104.6%

106.3%

85%

90%

95%

100%

105%

110%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

The increase in frequency and severity of claims is

driving up insurer payouts relative to premiums

65

Private Passenger Auto Insurance Loss Ratios Have Been Rising for A Decade and ROEs Have Been Falling.

SOURCE: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence, A.M. Best; Insurance Information Institute.

66

Combined Liability and Phys. DamageLoss Ratio Up: Private Passenger Auto, 2012 – 2017*

79.7% 80.2% 80.1%

82.6%

86.7%

84.7%

76%

78%

80%

82%

84%

86%

88%

2012 2013 2014 2015 2016 2017*

Loss Ratio

The Loss Ratio Across All Physical Damage Coverages Has Trended Generally Upward for Years

*2017 figure is for the 4 quarters ending in 2017:Q3Source: ISO/PCI Fast Track data; Insurance Information Institute

67

All Liability Coverages Loss Ratio Is Up:Private Passenger Auto, 2012 – 2017*

82.3%

85.0%83.1%

87.7%

91.4%

89.0%

76%78%80%

82%84%86%88%

90%92%94%

2012 2013 2014 2015 2016 2017*

Loss Ratio

Bodily Injury Loss Ratios Have Trended Generally Upward for Years

*2017 figure is for the 4 quarters ending in 2017:Q3Source: ISO/PCI Fast Track data; Insurance Information Institute

68

All Phys. Dam Coverages Loss Ratio Up:Private Passenger Auto, 2012 – 2017*

72.2%

74.5%75.3%

78.1%

80.8% 81.2%

66%

68%

70%

72%

74%

76%

78%

80%

82%

2012 2013 2014 2015 2016 2017*

Loss Ratio

The Loss Ratio Across All Physical Damage Coverages Has Trended Generally Upward for Years

*2017 figure is for the 4 quarters ending in 2017:Q3Source: ISO/PCI Fast Track data; Insurance Information Institute

69

Collision Loss Ratio Trending Upward:Private Passenger Auto, 2010 – 2017*

76.9%

73.8%

67.7%69.3% 69.4%

73.5%74.9%

76.7%

62%

64%

66%

68%

70%

72%

74%

76%

78%

2010 2011 2012 2013 2014 2015 2016 2017*

Loss Ratio

Collision Loss Ratios Were Trending Steadily Upward Until Early 2017

*2017 figure is for the 4 quarters ending in 2017:Q2Source: ISO/PCI Fast Track data; Insurance Information Institute

70

Comprehensive Loss Ratio Is Elevated:Private Passenger Auto, 2010 – 2017*

88.2%

71.0%76.5%

71.4%

85.8%92.9%

0%10%20%30%40%50%60%70%80%90%

100%

2012 2013 2014 2015 2016 2017*

Loss Ratio

The Comprehensive Loss Ratio Stands at Mulit-Year High, Pushed Upward in 2017 by Record CAT Activity

*2017 figure is for the 4 quarters ending in 2017:Q3Source: ISO/PCI Fast Track data; Insurance Information Institute

71

A Few Factors Driving Adverse Private Passenger Auto Loss Trends

More Jobs, Better Economy, More People Driving, More Expensive

Cars, Higher Speed Limits…

America is Driving More Again: 2000-2017Percent Change, Miles Driven*

*Moving 12-month total vs. prior year through December. Sources: Federal Highway Administration; Insurance Information Institute.

1.7%2.1%

1.5%

2.2%1.9%

1.0%0.4% 0.3%

-2.1%

-0.3%

0.8%

-0.3%

0.1%0.6%

1.9%

2.7%

1.2%

2001 2003 2005 2007 2009 2011 2013 2015 2017*-2.5%

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

Fastest Growth in More Than a

Decade

Tremendous Growth In Miles Driven. The More People Drive, the More Frequently They Get Into Accidents.

Why Are People Driving More Miles?Jobs? 2006–2017:Q2

Billions of Miles Driven in Prior Year

Sources: Federal Highway Administration; Seasonally Adjusted Employed from Bureau of Labor Statistics via FRED; Insurance Institute for Highway Safety; Insurance Information Institute.

People Drive to and from Work and Drive to Entertainment. Out of Work, They Curtail Their Movement.

120

125

130

135

140

145

150

2,800

2,850

2,900

2,950

3,000

3,050

3,100

3,150

3,200

3,250

06:Q

106

:Q3

07:Q

107

:Q3

08:Q

108

:Q3

09:Q

109

:Q3

10:Q

110

:Q3

11:Q

111

:Q3

12:Q

112

:Q3

13:Q

113

:Q3

14:Q

114

:Q3

15:Q

115

:Q3

16:Q

116

:Q3

17:Q

1

Miles Driven (left axis) # Employed (right axis)

Millions Employed

Recession

More People Working and Driving=> More Collisions, 2006-2017:Q2Number Employed, Millions

Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Information Institute.

When People are Out of Work, They Drive Less. When They Get Jobs,They Drive to Work, Helping Drive Claim Frequency Higher.

5.25.35.45.55.65.75.85.96.06.16.2

120

125

130

135

140

145

150

06:Q

1

06:Q

3

07:Q

1

07:Q

3

08:Q

1

08:Q

3

09:Q

1

09:Q

3

10:Q

1

10:Q

3

11:Q

1

11:Q

3

12:Q

1

12:Q

3

13:Q

1

13:Q

3

14:Q

1

14:Q

3

15:Q

1

15:Q

3

16:Q

1

16:Q

3

17:Q

1

Number Employed (left axis)Collision Claim Frequency (right axis)

Overall Collision Claims Per 100 Insured Vehicles

Recession

More Miles Driven => More Collisions 2006-2017:Q2Billions of Miles Driven in Prior Year

Sources: Federal Highway Administration; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Institute for Highway Safety; Insurance Information Institute.

The More Miles People Drive, the More Likely They are to Get in an Accident, Helping Drive Claim Frequency Higher.

5.5

5.6

5.7

5.8

5.9

6.0

6.1

6.2

2,7502,8002,8502,9002,9503,0003,0503,1003,1503,2003,250

06:Q

1

06:Q

3

07:Q

1

07:Q

3

08:Q

1

08:Q

3

09:Q

1

09:Q

3

10:Q

1

10:Q

3

11:Q

1

11:Q

3

12:Q

1

12:Q

3

13:Q

1

13:Q

3

14:Q

1

14:Q

3

15:Q

1

15:Q

3

16:Q

1

16:Q

3

17:Q

1

Miles Driven (left axis)Collision Claim Frequency (right axis)

Overall Collision Claims Per 100 Insured Vehicles

Recession

Does Spending on Vehicles Affect Claim Severity?

Annual Change, 2005 through 2017

Source: Fast Track Monitoring System; Bureau of Labor Statistics Consumer Expenditure Survey (vehicle purchases –net outlay) Insurance Information Institute.

As the Economy Has Gotten Better, People Are Spending More on Vehicles – When Those Cars Are in Accidents, Severity Increases.

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Collision Severity (left scale)

Previous 6-yr avg vehicle purchases (right scale)

77

A Few Factors Driving Adverse Private Passenger Auto Loss Trends

More Jobs, Better Economy, More People Driving, Lower Gas

Prices, More Expensive Cars, Higher Speed Limits…

79

-0.4

%

0.1%

-2.5

%

2.2%

1.0%

3.6%

-1.4

%

0.4% 0.9%

-0.1

%

-3.0

%

-9.5

%

-9.0

%

-2.4

% -0.1

%

3.1%

-2.9

%

0.1%

8.0%

5.0%

-1.0

%

-7.0

%

-5.9

%

2.2%

1.5% 2.0%

0.7%

-12%-10%

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

10%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 1617E

Annual Change (%)

*2017 estimate from NSC data.Source: National Safety Council.

Motor vehicle deaths saw their

largest increase in 50 years in 2016

U.S. Annual Change in Automobile Deaths, 1991- 2017E*

Driving Has Been Getting Safer For Decades, But Recent Trend Is Discouraging—40,200 Deaths in 2016—Little Improvement in 2017

Sharp increase in

use of seatbelts

Steep drop due to less

driving during the Great

Recession

2015/16 is the largest 2-year escalation in

53 years

80

Collision Repair Cost Drivers

The Bottom Line:High Tech Vehicles Are Expensive

to Repair

“Key to Key”: Vehicle Repair Times Are Increasing, 2013-2017

Driveable+0.6 days (+18.9%)

Non-Driveable+2.3 days (+20.3%)

Total+1.0 days (+15.2%)

Source: CCC accessed via PropertyCasualty360.com at: https://www.propertycasualty360.com/native/?mvi=204cd819dffd479f9551e33dc691c4a8&mvpf=e9c65c7f741c449bbb8c0ebe08e5a1c9&mvpflabel=&et=editorial&bu=PC360&cn=20180305&src=EMC-Email&pt=Daily&slreturn=20180205153245

Direct Repair Program Vehicle Volume by Repair Cost Range and Drivability, 2013-2017

Non-drivable share has been

decliningSource: CCC accessed via PropertyCasualty360.com at: https://www.propertycasualty360.com/native/?mvi=204cd819dffd479f9551e33dc691c4a8&mvpf=e9c65c7f741c449bbb8c0ebe08e5a1c9&mvpflabel=&et=editorial&bu=PC360&cn=20180305&src=EMC-Email&pt=Daily&slreturn=20180205153245

Repair costs have been

drifting upward

DRP Cycle Time (Avg. Vehicle-in-to-Out Days) by Repair Cost Range, 2017

Source: CCC accessed via PropertyCasualty360.com at: https://www.propertycasualty360.com/native/?mvi=204cd819dffd479f9551e33dc691c4a8&mvpf=e9c65c7f741c449bbb8c0ebe08e5a1c9&mvpflabel=&et=editorial&bu=PC360&cn=20180305&src=EMC-Email&pt=Daily&slreturn=20180205153245

Cycle time increases almost

exponentially with repair cost

DRP Shop Productivity by Repair Cost Range, 2017

Source: CCC accessed via PropertyCasualty360.com at: https://www.propertycasualty360.com/native/?mvi=204cd819dffd479f9551e33dc691c4a8&mvpf=e9c65c7f741c449bbb8c0ebe08e5a1c9&mvpflabel=&et=editorial&bu=PC360&cn=20180305&src=EMC-Email&pt=Daily&slreturn=20180205153245

Productivity of repairs falls of

dramatically for more expensive jobs

DRP Repair Customer Satisfaction by Repair Cost Range, 2017

Source: CCC accessed via PropertyCasualty360.com at: https://www.propertycasualty360.com/native/?mvi=204cd819dffd479f9551e33dc691c4a8&mvpf=e9c65c7f741c449bbb8c0ebe08e5a1c9&mvpflabel=&et=editorial&bu=PC360&cn=20180305&src=EMC-Email&pt=Daily&slreturn=20180205153245

Unsurprisingly, customer satisfaction with both the repair shop and insurer

drops as repair cost (and therefore repair time) rises

DRP Repair Customer Satisfaction by Repair Cost Range, 2017

Source: CCC accessed via PropertyCasualty360.com at: https://www.propertycasualty360.com/native/?mvi=204cd819dffd479f9551e33dc691c4a8&mvpf=e9c65c7f741c449bbb8c0ebe08e5a1c9&mvpflabel=&et=editorial&bu=PC360&cn=20180305&src=EMC-Email&pt=Daily&slreturn=20180205153245

Unsurprisingly, customer satisfaction with both the repair shop and insurer

drops as repair cost (and therefore repair time) rises

Electric Car Stock in the US: 2005–2016*

1.1

1.1

1.1

2.6

74.7

171.

4

290.

2 404.

1

563.

7

2.6

3.8 21

.5

0

100

200

300

400

500

600

05 06 07 08 09 10 11 12 13 14 15 16

Household energy demand arising from vehicles will continue to soar

*Includes plug-inn vehicles and hybrids.Source: International Energy Agency, 2017 Global Electric Vehicle Outlook accessed at:

https://www.iea.org/publications/freepublications/publication/GlobalEVOutlook2017.pdf; USC RUM. 87

(Thousands of Cars)The number of EVs in the US is increasing

exponentially

Electric Car Market Share in the US: 2010–2016*

0.01%

0.17%

0.44%

0.75% 0.74%0.67%

0.91%

0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%0.9%1.0%

10 11 12 13 14 15 16

*Includes plug-inn vehicles and hybrids.Source: International Energy Agency, 2017 Global Electric Vehicle Outlook accessed at:

https://www.iea.org/publications/freepublications/publication/GlobalEVOutlook2017.pdf; USC RUM. 88

(Market Share)

EVs market share in the US is growing,

rapidly but us still tiny

89

INDUSTRY DISRUPTORS

Technology, Society and the Economy Are All

Changing at a Rapid PaceReality vs. Drinking the Silicon Valley Kool Aid

89

90

The Internet of Things and the Insurance Industry Value Chain

Source: Willis Capital Markets & Advisory; Insurance Information Institute.

Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider?

91

The Sharing Economy Has Grown—And Attracted Political Scrutiny

There’s no question that the hype around autonomous vehicles far exceeds the reality

92

The Internet of Things and the Insurance Industry

The “Internet of Things” will create trillions in economic value throughout the global economy by 2025

What opportunities, challenges will this create for insurers?

What are the impact on the insurance industry “value chain”?Sources: McKinsey Global Institute, The Internet of Things: Mapping the Value Beyond the Hype,

June 2015; Insurance Information Institute.

93

Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance

By 2035, it is estimated that 25% of new vehicle

sales could be fully autonomous models

Source: Boston Consulting Group.

Questions Are auto insurers

monitoring these trends? How are they reacting? Will Google or (Amazon)

take over the industry? Will the number of auto

insurers shrink? How will liability shift?

94

A Few of the (Many) Technological Hurdles Facing Autonomous VehiclesTech Hurdle Discussion of ProblemInability to Operate Safely in All Weather Conditions

Heavy rain, snow, fog and compromise radar and lidar sensor technologies, requiring humans to intervene

Driving Safely Despite Unclear Lane Markings

Vehicle can have difficultly making guidance decisions when lines on roads are faint or absent.

Reliably Recognizing Traffic Lights that Are Not Working Properly

If lights are out (e.g., power outage), vehicle has no understanding of how to operate. Requires that a machine be taught human intuition understand cooperation among multiple vehicles as well as external input from non-drivers (e.g., police)

Ability to Respond to Spoken Commands or Hand Signals from Law Enforcement, Highway Safety Employees, Construction Crews, Pedestrians, Cyclists, etc.

Verbal instructions, eye contact, hand signals, gesturing all play extremely important roles in driving, more so than is generally appreciated or understood.

Source: Adapted from: Technologists Face Hurdles Before They Take Wheel, John Markoff, New York Times, June 8, 2017.

I.I.I. Poll: Driverless CarsWhy Americans Would Not Want to Ride in a Driverless Car, May 20161

1 Based on those who would not ride in a driverless car. Respondents could give more than one answer. Source: Insurance Information Institute Annual Pulse Survey.

84%74% 72%

62% 59%

42%36%

1% 1%0%

10%20%30%40%50%60%70%80%90%

100%

Would NotFeel Safe

Don't Wantto Give Up

Control

ComputerCould BeHacked

Cars WouldBe Too

Expensive

Would BeLiable for

AnyAccident

WouldCollect

PersonalData

Would BeBoring

None ofThese

Don’t Know

Safety Concerns Are Paramount Among Those Who Would Avoid Driverless Cars.

97

Car Subscription Services: A Threat to Personal Auto?

Liberty Mutual, Assurant, Chubb have struck multiple deals

Volvo, Ford, Cadillac, Porsche, BMW and Mercedes-Benz have either launched or announced plans to launch car subscription models

Source: CB Insights accessed 3/14/18 at: https://www.cbinsights.com/research/insurance-car-subscription-partnerships/

98

Car Subscription Services: A Threat to Personal Auto? Ford’s Canvas

programs states that it provides: BI & PD Liability $300K combined single limit), PIP, Med Pay, UI/UIM, Collision & Comprehensive ($500 deductible), Roadside Assistance, Rental Reimbursement

No flexibility in coverage but can use own auto insurance as primary and Canvas as excess

Source: www.drivecanvas.com accessed 3/14/18.

99

Car Subscription Services: Insurers Partnering with US Car Subscription and Sharing Programs

Source: CB Insights accessed 3/14/18 at: https://www.cbinsights.com/research/insurance-car-subscription-partnerships/

The car subscription

service is tiny—and how much it

will grow is uncertain;For auto

manufacturers car subscriptions are

a variation on leasing. For auto

insurers, there is a more meaningful distinction (e.g.,

personal or commercial exposure)

100

Distribution Trends

Distribution by Channel Type Continues to Evolve Around

the World

101

Personal Lines Distribution Channels, Direct vs. Independent Agents, 1972-2015

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

80%

72 8384 8586 8788 8990 9192 9394 9596 9798 9900 0102 0304 0506 0708 0910 1112 1314 15Direct Independent Agents

Independent agents have lost significant personal lines market share since the early 1970s. That

trend trend slowed from 2000-2007, but accelerated during the financial crisis, though it

may be slowing again.

102

INSURANCE TECHNOLOGY:FIN TECH ZEROES IN

Number and Value of Deals Is Increasing

An Industry that Has Always Been Accepting of Change and Innovation

InsurTech Annual Financing,2011 – 2016

Value of Deals ($ Millions)

Source: CB Insights at https://www.cbinsights.com/blog/2016-insurance-tech-funding/

$140$350 $270

$870

$2,670

$1,690

91

4628

122

173

63

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2011 2012 2013 2014 2015 2016 020406080100120140160180200220

Value of Deals Number of Deals

No. of Deals

Insurance tech deals reached a new record in 2016 but funding was higher in 2015

2 out of every 3 InsurTech deals in 2016 was at the early stage!

104

Top 25 P/C Insurers by Direct Written Premium, 2015

Sources: NAIC from CB Insights at https://www.cbinsights.com/blog/largest-pc-insurers-rank-startup-investments/

Are large P/C insurers more likely to invest in InsurTech start-ups?

105

Start-Up InsurTech Investments by Top 25 P/C Insurers, 2015 - 2017*

*As of June 23, 2017.Sources: NAIC from CB Insights at https://www.cbinsights.com/blog/largest-pc-insurers-rank-startup-investments/

USAA and AmFam lead in P/C InsurTech

investment

10 of the Top 25 P/C insurers have made InsureTech start-up investments since 2015.—but there is little correlation between size and number of

investments within this group

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email me at robert.hartwig@moore.sc.edu

106