2. Overview and Outlook for the P/C Insurance Industry Casualty Actuaries of New England April 2, 2012 Sturbridge, MA Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Office: 212.346.5540  Cell: (917) 494-5945  stevenw@iii.org  www.iii.org

3. Not All Data in a PowerPoint Slide Are Accurate or Reliable © 2010 Karen Clark & Company 2

4. 3 The Economic Situation Its Effect on the Industry’s Exposure Base, Growth, Investments, and Profitability

5. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 4 Length of US Business Cycles, 1929–Present* *Through March 2012. ** Post-WW II period through end of most recent completed expansion. Sources: National Bureau of Economic Research; Insurance Information Institute. Average Duration Recession* = 10.9 Mos Expansion** = 60.5 Mos Length of Expansions Greatly Exceeds Contractions Duration (Months)

6. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 5 A Weak Recovery is Forecast: Real GDP Growth*, Yearly, 1970-2013F Estimates/Forecasts from Blue Chip Economic Indicators, 3/2012 issue. *chained 2005 $ Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.http://www.bea.gov/national/xls/gdpchg.xls Real GDP Growth (%) The “consensus” forecast is for at least two more years of real yearly GDP growth below 3% -- weaker than after most recent recessions

7. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 6 US Real GDP Growth, quarterly* *Estimates/Forecasts from Blue Chip Economic Indicators Source: US Department of Commerce, Blue Economic Indicators 3/2012 issue (forecasts); Insurance Information Institute. Demand for insurance continues to be affected by a sluggish economy Real GDP Growth (%) We need stronger growth than this to return the economy to its full capacity anytime soon. Worst quarterly drop since 1958:q1 (-11.1%)

8. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 7 March 2012 Forecasts of Quarterly US Real GDP for 2012-13 Sources: Blue Chip Economic Indicators (3/12); Insurance Information Institute Real GDP Growth Rate

9. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 8 A Look Back: March 2011 Forecasts of Quarterly US Real GDP for 2011 Sources: Blue Chip Economic Indicators (2/12); Insurance Information Institute Real GDP Growth Rate A month into 2011, all forecasts for the year predicted steady growth, but at different rates.

10. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 9 Off Target: March 2011 Forecasts for 2011 vs. Actual US Real GDP Sources: Blue Chip Economic Indicators (2/12); Insurance Information Institute Real GDP Growth Rate This 3.0% growth number is preliminary and will be revised Even the most pessimistic forecasts were too bullish for the first three quarters of 2011. They were close to the fourth quarter number, though.

11. First Half of 2012: Fastest Growth [3+%] Expected in MI, AL, NV, ND, SC 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 10 MA: +2.89% VT: +2.57% CT: +2.04% NH: +1.87% ME: +0.05% RI: -3.57%

12. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 11 Real GDP Growth* vs. Real P/C Premium Growth: Modest Association *in chained 2005$ Sources: A.M. Best, US Bureau of Economic Analysis; Insurance Information Institute P/C Insurance Industry’s Growth is Influenced Modestly by Growth in the Overall Economy Real GDP Growth vs. Real P/C (%)

13. The Strength of the Economy Will Influence P/C Insurer Growth Opportunities 12 Growth Will Expand Insurable Exposures and Help Absorb Excess Capital 12/01/09 - 9pm 12

14. Consumer Sentiment Survey, Jan 1978-Mar 2012 (1966 = 100) 13

15. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 14 Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Jan. 2012 *seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/ Monthly shipments are nearly back to peak (which happened in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to December 2011 was 30.2%. This growth leads to gains in many commercial exposures: WC, Commercial Auto, Property and Various Liability Coverages The value of Manufacturing Shipments in Dec. 2011 was up 30.2% to $464B from its May 2009 trough. Dec. figure is only 4.5% below its previous record high in July 2008. $ Millions 12/01/09 - 9pm 14

16. 12/01/09 - 9pm 15 Manufacturing Growth for Selected Sectors, Jan. 2012 vs. Jan. 2011 Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages Growth (%) Manufacturing of durable goods has been especially strong *seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/ Durables: +10.1% Non-Durables: +7.1%

17. 16 Labor Market Trends Job Growth Finally Taking Hold, Bolstering the Commercial & Personal Lines Exposure Bases, but Problems Remain

18. Monthly Change in Private Employment* January 2007 through February 2012 (Thousands) At the rate of job growth in December 2011 through February 2012, the unemployment rate will be down to 7.5% by the end of 2012. *seasonally adjusted Sources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute.http://www.bls.gov/ces/home.htm Nov. ‘08.–Apr. 09 monthly losses were the largest in the Post-WW II period Private employers added jobs in every one of the last 24 months Payroll growth since Jan 2010: $340.3 billion, equivalent to roughly $2.25 billion in WC premiums

19. Monthly Change in Government Employment* (Thousands) In 2011 employment by government at all levels dropped every month except August. Total jobs lost in last twelve months: 278,000. *seasonally adjusted Sources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute.http://www.bls.gov/ces/home.htm January 2009 through February 2012 Census

20. Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised (Thousands) The September 2011 report for employment in August was dis-spiriting. BLS reported the U.S. economy added no net jobs. Was the recovery stalling? Would we sink into another recession? Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institutehttp://www.bls.gov/ces/home.htm

21. Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised (Thousands) In the October report the August figures were revised. This report showed gains in both private and government employment, for a net addition of 57,000 jobs. Where were these revisions (and their implications) reported? Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institutehttp://www.bls.gov/ces/home.htm

22. Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised (Thousands) In the November report the August employment numbers were revised again, now showing that the economy in August to adding 105,000 net new jobs. Latest report: +85,000 jobs. Where were these revisions (and their implications) reported? Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institutehttp://www.bls.gov/ces/home.htm

23. Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised (Thousands) In the January 2012 report for August, BLS revised the U.S. numbers for all of 2011 to reflect new population estimates, on which the employment samples from each month are projected. Latest August data: +85,000 jobs. Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institutehttp://www.bls.gov/ces/home.htm

24. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 23 Percentage Change in Nonfarm Employment, US & New England states, Jan 2012 vs. Jan 2011 *Preliminary data for January 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics, Regional and State Employment and Unemployment—January 2012, published March 13, 2012; Insurance Information Institute. Percent Change

25. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 24 (Millions of Units) Private Housing Starts, 1990-2013F Sources: U.S. Census Bureau and Department of Housing and Urban Development (history) at http://www.census.gov/const/newresconst.pdf ; Blue Chip Economic Indicators (3/2012), forecasts; Insurance Information Institute. http://www.census.gov/const/newresconst.pdf Weak home construction forecast implies little exposure growth likely for Homeowners insurers for the next few years, but homeowners might fortify homes to mitigate storm and other damage. Forecast range for 2012: 610,000 to 900,000 Forecast range for 2013: 680,000 to 1,450,000

26. Single vs. Multi-Family Housing Starts, Annually, 2001-2012* *January 2012 data, annualized, seasonally-adjusted, preliminary Source: US Census Bureau at http://www.census.gov/construction/nrc/pdf/newresconst.pdfhttp://www.census.gov/construction/nrc/pdf/newresconst.pdf Thousands of Units, Multi-Family The slump is mainly in single-family housing, but starts of multi-family units also plunged in 2009-10. Multi-family-unit starts rose in 2011, and single-family starts are starting up in 2012. Thousands of Units, Single Family Multi-family plunge didn’t begin until 2009 Single family plunge began in 2006

27. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 26 Private Housing Starts in the Northeast US, Monthly*, 1990-2012 *seasonally-adjusted annual rate; data through January 2012 Sources: U.S. Census Bureau and Department of Housing and Urban Development at http://www.census.gov/const/newresconst.pdf ; Insurance Information Institute.http://www.census.gov/const/newresconst.pdf Billions

28. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 27 (Millions of Units) The Car-Buying Slump Will Create Pressure to Replace Aging Vehicles Sources: history--U.S. Department of Commerce; forecasts (including 2011 preliminary--Blue Chip Economic Indicators (3/2012); Insurance Information Institute; USA Today 8/10/2011 edition (AAA Survey). Many more older cars are on the road today than In “normal” times. Previously in a 3-year span, new cars would replace about 35 million old cars, but in 2008-10 only about 27 million old cars were replaced. 2011 AAA Survey: 1 in 4 drivers have neglected repairs and maintenance because of the economy Forecast range for 2012: 13.4 to 15.1 Forecast range for 2013: 13.9 to 16.0

29. Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.http://www.federalreserve.gov/releases/g17/Current/default.htm 28 Percent of Industrial Capacity Hurricane Katrina March 2001- November 2001 recession “Full Capacity” The closer the economy is to operating at “full capacity,” the greater the inflationary pressure The US operated at 78.7% of industrial capacity in Feb. 2012, above the June 2009 low of 68.3% and close to its post-crisis peak December 2007- June 2009 Recession March 2001 through February 2012 12/01/09 - 9pm 28

30. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 29 Business Bankruptcy Filings, 1980-2011 Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline 2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more than tripled during the financial crisis. % Change Surrounding Recessions 1980-82 58.6% 1980-87 88.7% 1990-91 10.3% 2000-01 13.0% 2006-09 208.9%* 12/01/09 - 9pm 29

31. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 30 Private Sector Business Starts, 1993:Q2 – 2011:Q2* Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But Are Recovering Slowly * Data through June 30, 2011 are the latest available as of March 15, 2012; Seasonally adjusted; **Annualized based on 2011:H1 actual data. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.http://www.bls.gov/news.release/cewbd.t08.htm (Thousands) Business starts were up 4.5% to 370,000 in the first half of 2011 vs. first half 2011. 722,000 new business starts were recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new business starts since 1993 Business Starts 2006: 872,000 2007: 843,000 2008: 790,000 2009: 697,000 2010: 722,000 2011: 740,000** 12/01/09 - 9pm 30

32. 31 Inflation Trends/Forecasts and Effects on Claims

33. 12/01/09 - 9pm 32 Historic and Forecast Annual Inflation Rates, (CPI-U, %), 1990–2017F Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/12 (forecasts). The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and commodity prices, plus U.S. debt burden, remain longer-run concerns Annual Inflation Rates (%) Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble reduced inflationary pressures in 2009/10 Higher energy, commodity and food prices pushed up inflation in 2011, but not longer turn inflationary expectations.

34. P/C Personal Insurance Claim Cost Drivers Grow Faster Than the Core CPI Suggests Sources: Bureau of Labor Statistics; Insurance Information Institute. Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least 33 Excludes Food and Energy Price Level Change: 2011 vs. 2010 12/01/09 - 9pm 33

35. P/C Commercial Property Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests Sources: Bureau of Labor Statistics; Insurance Information Institute. Copper prices spiked and retreated in 2011. In July its price was 33% higher than a year earlier; by November it cost 8% less than in November 2010. 34 Excludes Food and Energy Price Level Change: 2011 vs. 2010 12/01/09 - 9pm 34

36. P/C Premium and Underwriting Trends 35 Mainly Driven by the Industry’s Underwriting Cycle, Not the Economy

37. 12/01/09 - 9pm 36 Soft Market Persisted into Early 2011 but Growth Returned: More in 2012? (Percent) 1975-781984-872000-03 *2011 and 2012 figures are A.M. Best Estimates Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3- Year Decline Since 1930-33. NWP was up 3.5% (est.) in 2011 2012 forecast: 3.8% growth

38. 12/01/09 - 9pm 37 P/C Insurance Industry Combined Ratio, 2001–2011:Q3* * Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO. Best Combined Ratio Since 1949 (87.6) As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Relatively Low CAT Losses, Reserve Releases Cyclical Deterioration Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Avg. CAT Losses, More Reserve Releases Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market

39. 12/01/09 - 9pm 38 P/C Reserve Development, 1992–2013F Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to Further Diminish in 2012 and 2103 Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best. Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from $7.1 billion in the first half of 2009

40. P/C Insurance Industry Financial Performance 39 A Resilient Industry in Challenging Times

41. P/C Net Income After Taxes 1991–2011:Q3 ($ Millions) 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS 1 = 1.9% P-C Industry 2011:Q3 profits were down 71% to $8.0B vs. 2010:Q3, due primarily to high catastrophe losses and as non-cat underwriting results deteriorated * ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO, Insurance Information Institute 12/01/09 - 9pm 40

42. A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE * 2008 -2010 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011-12 combined ratios are A.M. Best estimate excl. M&FG insurers. Source: Insurance Information Institute from A.M. Best and ISO data. Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs A combined ratio of about 100 generated ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979 12/01/09 - 9pm 41

43. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012F* *Profitability = P/C insurer ROEs. 2011-12 figures are A.M. Best estimates. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG. Source: Insurance Information Institute; NAIC, ISO, A.M. Best. 1977:19.0% 1987:17.3% 1997:11.6% 2006:12.7% 1984: 1.8% 1992: 4.5% 2001: -1.2% 10 Years 9 Years 2012F: 6.1%* History suggests next ROE peak will be in 2016-2017 ROE 1975: 2.4% 2011E: 3.9% 12/01/09 - 9pm 42

44. Financial Strength & Capacity 43 The P-C Industry Has Weathered the Storm Well

45. P/C Insurer Impairments, 1969–2011 Source: A.M. Best Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute. The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets 3 small Missouri insurers did encounter problems in 2011 after the May tornado in Joplin. They were absorbed by a larger insurer and all claims were paid. 12/01/09 - 9pm 44

46. 12/01/09 - 9pm 45 P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011 Source: A.M. Best; Insurance Information Institute 2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969 Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

47. 12/01/09 - 9pm 46 Reasons for US P/C Insurer Impairments, 1969–2010 Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011. Historically, Deficient Loss Reserves and Inadequate Pricing Are By Far the Leading Cause of P-C Insurer Impairments. Investment and Catastrophe Losses Play a Much Smaller Role Deficient Loss Reserves/ Inadequate Pricing Reinsurance Failure Rapid Growth Alleged Fraud Catastrophe Losses Affiliate Impairment Investment Problems (Overstatement of Assets) Misc. Sig. Change in Business

48. 12/01/09 - 9pm 47 Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010 Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011. Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade Workers Comp Financial Guaranty Pvt. Passenger Auto Homeowners Commercial Multiperil Commercial Auto Liability Other Liability Med Mal Surety Title

49. US Policyholder Surplus: 1975–2009:Q3* * As of 9/30/09 Source: A.M. Best, ISO, Insurance Information Institute. “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations ($ Billions) The Premium-to-Surplus Ratio Stood at $0.87:$1 as of 9/30/09, Up from Near Record Low of $0.85:$1 at Year-End 2007 Surplus as of 9/30/09 was $490.8B, up from $437.1B as of 3/31/09. Recent peak was $521.8 as of 9/30/07. Surplus as of 9/30/09 is now only 5.9% below 2007 peak; Crisis trough was as of 3/31/09  16.2% below 2007 peak.

50. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 49 Policyholder Surplus, 2006:Q4–2011:Q3 Source: ISO; A.M.Best. ($ Billions) 2007:Q3 = previous surplus peak Quarterly Surplus Changes Since 2011:Q1 Peak 11:Q2: -$5.6B (-1.0%) 11:Q3: -$26.1B (-4.6%) Surplus as of 9/30/11 was down 4.6% below its all time record high of $564.7B set as of 3/31/11. Further declines are possible Note: Beginning in 2010:Q1 figures include $22.5B of paid-in capital from a holding company parent to a subsidiary insurer. It was a single investment in a non-insurance business. The industry now has $1 of surplus for every $0.83 of NPW, close to the strongest claims- paying status in its history

51. Investment Performance 50 Weak Investment Results Are a Main Cause of Low Profits

52. P/C Insurance Industry Investment Gain: 1994–2011:Q3 1 Investment gains recovered significantly in 2010 due to realized capital gains. The financial crisis caused investment gains to fall by 50% in 2008 1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. *2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute. ($ Billions) Investment gains at 2011:3Q were about $2.1 billion better than the same period in 2010 51

53. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 52 P/C Insurer Net Realized Capital Gains/Losses, 1990-2011E *2011 is an estimate based on annualized actual 2011 9-month figure of $5.5B. Sources: A.M. Best, ISO, Insurance Information Institute. Insurers Posted Net Realized Capital Gains in 2011 for the First Time Since 2007. Realized Capital Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE ($ Billions) $11.2B positive swing 12/01/09 - 9pm 52

54. 53 2011: Nowhere to Run, Nowhere to Hide Most of the Country East of the Rockies Suffered Severe Weather in 2011, Impacting Most Insurers 12/01/09 - 9pm 53

55. Number of Federal Disaster Declarations, 1953-2012* *Through March 9, 2012. Sources: Federal Emergency Management Administration at http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute. http://www.fema.gov/news/disaster_totals_annual.fema There have been 2,057* federal disaster declarations since 1953. Note that 2005 was a relatively low year for number of disaster declarations in the 1996-2010 period, but that year included Hurricanes Katrina, Rita, and Wilma. The number of federal disaster declarations set a new record in 2011. From 1953-71, the average number of declarations per year was 16.5. The average number from 1996- 2010 was 58.4. The average number from 1972-1995 was 31.7.

56. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 55 15 Costliest World Insurance Losses, 1970-2011* Insured Losses, 2010 Dollars, $ Billions *Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable. Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute. Taken as a single event, the Spring 2011 tornado season would be the 7 th costliest event in global insurance history 3 of the 11 most expensive catastrophes in world history occurred in the past 9 months

57. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 56 US Insured Catastrophe Losses *First three quarters of 2011 (est). 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 = $12.2B. Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute. First half 2011 US CAT losses exceeded losses from all of 2010. Even modest fourth quarter losses will put 2011 among the worst ever for CATs CAT Losses Surged on Near- Record Tornado Activity ($ Billions) 2000s: A Decade of Disaster 2001-2010: $202B (up 122%) 1991-2000: $91B

58. Number of Federal Fire Management Assistance Declarations, 1953-2012* *Through March 9, 2012. Sources: Federal Emergency Management Administration at http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute. http://www.fema.gov/news/disaster_totals_annual.fema There have been 974* federal fire management assistance declarations since 1953. From 1953-69, there were no fire management assistance declarations The average number from 1994- 2010 was 48.9. The average number from 1970-1993 was 3.75.

59. 58 Federal Disaster Declarations in New England States, 1953 – 2012* *Through Feb. 26, 2012. Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.http://www.fema.gov/news/disaster_totals_annual.fema Over the past nearly 60 years, Texas has had the highest number of Federal Disaster Declarations 12/01/09 - 9pm

60. 59 *Through February 5, 2012. Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.htmlhttp://www.spc.noaa.gov/climo/online/monthly/newm.html Number of Tornadoes and Related Deaths, 1990 – 2012* Tornadoes claimed 550 lives in 2011, the most since 1925 There were 1,709 tornadoes recorded in the US in 2011 Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin

61. U.S. Tornado Count, 2005-2011 60 Source: http://www.spc.noaa.gov/wcm/http://www.spc.noaa.gov/wcm/ There were 1,893 tornadoes in the US in 2011 far above average, but well below 2008’srecord Deadly and costly April/ May spike

62. Location of Tornadoes in the US, 2011 Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 61 1,894 tornadoes killed 552 people in 2011, including at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in Joplin on May 22

63. Location of Large Hail Reports in the US, 2011 Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 62 There were 9,417 “Large Hail” reports in 2011, causing extensive damage to homes, businesses and vehicles

64. Location of Wind Damage Reports in the US, 2011 Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 63 There were 18,685 “Wind Damage” reports through Dec. 27, causing extensive damage to homes and, businesses

65. Severe Weather Reports, 2011 64 Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# There were 29,996 severe weather reports in 2011; including 1,894 tornadoes; 9,417 “Large Hail” reports and 18,685 high wind events

66. 65 Economics 2012: The World Is Changing 2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive Potentially Enormous Benefits for P/C Insurers 12/01/09 - 9pm 65

67. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 66 Economic Outlook for 2012 Economic Growth Will Accelerate Modestly in 2012/13, Beating Expectations  No Double Dip Recession  Economy remains more resilient than most pundits presume Consumer Confidence Will Continue to Improve Consumer Spending/Investment Will Continue to Expand Consumer and Business Lending Continue to Expand Housing Market Remains Weak, but Some Improvement Expected in 2012 Inflation Remains Tame  Runaway inflation highly unlikely but energy spike possible; Fed has things under control Private Sector Hiring Remains Consistently Positive, Exceeds Expectations  Unemployment dips below 8% by year’s end Sovereign Debt, Euro Currency/Economy, Muni Bond “Crises” Overblown European Recession is Milder than Commonly Presumed Soft Landing in China Higher Oil Prices and Current Middle East Turmoil Pose Greater Risk to US Economy than in 2011 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End Political Environment Is More Hospitable to Business Interests

68. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 67 1.P/C Insurance Exposures Grow Robustly  Personal and commercial exposure growth is certain in 2012; Strongest since 2004  But restoration of destroyed exposure will take until mid-decade 2.P/C Industry Growth in 2012 Will Be Strongest Since 2004  Growth likely to exceed A.M. Best projection of +3.8% for 2012  No traditional “hard market” emerges in 2012 3.Underwriting Fundamentals Deteriorate Modestly  Some pressure from claim frequency, in some severity in key lines 7 Insurance P/C Industry Predictions for 2012

69. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 68 4.Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures  Wage growth is also positive and could modestly accelerate  WC will prove to be tough to fix from an underwriting perspective 5.Increase in Demand for Commercial Insurance Will Accelerate in 2012  Includes workers comp, property, marine, many liability coverages  Laggards: inland marine, aviation, commercial auto, surety  Personal Lines: Auto leads, homeowners lags (though HO leads in NPW growth due to rates) 6.Investment Environment Is/Remains Much More Favorable  Return of realized capital gains as a profit driver 7.Industry Capacity Hits a New Record by Year- End 2012 (Barring Mega-CAT ) 7 Insurance P/C Industry Predictions for 2012

70. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 69 10 Greatest Potential Threats to the Global Economy as of March 2012 1.Conflict in the Middle East, Disrupting Oil Markets  A conflict between Iran and Israel viewed by some as imminent  $200/bbl oil is possible; Severe supply disruptions  Result  serious damage to the global economy, killing fragile recovery 2.Rising Oil Prices  Even in the absence of conflict, oil prices slowing growth  Sustained $10/bbl increase  -0.2% on global GDP in Year 1; -0.5% Year 2 3.Sovereign Debt Concerns in Europe (was #1 threat in 2011)  Contagion spreads beyond Greece  Italy, Spain, Portugal, etc.  Greek/EU political/economic solution fails resulting in disorderly default 4.“Hard Landing” of Chinese Economy  A sharp decline in China’s GDP would damage global economies

71. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 70 10 Greatest Potential Threats to the Global Economy as of March 2012 5.Mega-Catastrophe Trends Continue at Record Pace  Catastrophes trimmed 0.5% off global GDP in 2011  Massive disruptions to fragile global supply chains 6.Sudden Weakening of US Economy 7.Intensification of Geopolitical Instability (esp. in Middle East) 8.Disintegration of Eurozone (Political Failure) 9.Commodity Price Inflation (apart from oil) 10.Large-Scale Cyber Attack/Terrorism Attack (including cyberterror)

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