1. P/C Insurance Market Update: Trends, Challenges and Opportunities in 2016 and Beyond Independent Insurance Agents of Wisconsin Wisconsin Dells, WI May 11, 2016 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5540  Cell: 917.494.5945  stevenw@iii.org  www.iii.org

2. 2 Insurance Industry: Financial Update & Outlook 2015 Was a Reasonably Good Year 2016: A Repeat of 2015? 12/01/09 - 9pm 2

3. eSlide – P6466 – The Financial Crisis and the Future of the P/C 3 Net Premium Growth: Annual Change, 1971—2016F 1975-781984-872000-03 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. 2016F: 4.5% 2015: 3.4% 2014: 4.2% 2013: 4.6% 2012: 4.3% 16 Years 16 Years? 2016-19

4. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 4 P/C Insurance Industry Combined Ratio, 2001–2015* * 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. Sources: A.M. Best, ISO. Best Combined Ratio Since 1949 (87.6) Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Insurers Paid Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses

5. P/C Industry Net Income After Taxes 1991–2015 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS 1 = 3.5% 2012 ROAS 1 = 5.9% 2013 ROAS 1 = 10.2% 2014 ROAS 1 = 8.4% 2015:ROAS = 8.4% ROE figures are GAAP; 1 Return 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. Sources: A.M. Best, ISO; Insurance Information Institute. $ Millions

6. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016F *Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning 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 History suggests next ROE peak will be in 2016-2017, but that seems unlikely ROE 1975: 2.4% 2013 9.8% 2014 8.4% 2015=8.4% 2016F=6.3%

7. 7 Return on Net Worth (RNW) Largest Lines: 2005-2014 Average Source: NAIC; Insurance Information Institute. Commercial lines have tended to be more profitable than personal lines over the past decade Percent

8. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 8 All Lines 10-Year (2005-2014) RNW Avg. Varies Widely by State and Region Source: NAIC Southeast Mid-Atlantic New England U.S. 7.7%

9. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 9 All Lines 10-Year (2005-2014) RNW Avg. Varies Widely by State and Region Source: NAIC Southwest Mountain Far West Great Plains Great Lakes

10. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 10 Policyholder Surplus, 2006:Q4–2015 Sources: ISO, A.M.Best. ($ Billions) 2007:Q3 Pre-Crisis Peak Surplus as of 12/31/15 stood at $673.7B 2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non- insurance business. The industry now has $1 of surplus for every $0.75 of NPW, close to the strongest claims-paying status in its history. Drop due to near-record 2011 CAT losses The P/C insurance industry entered 2016 in very strong financial condition.

11. The Strength of the Economy Will Influence P/C Insurer Growth Opportunities 11 Growth Will Expand Insurer Exposure Base Across Most Lines 12/01/09 - 9pm 11

12. 12/01/09 - 9pm 12 Real U.S. Quarterly GDP Growth Since the “Great Recession Data are quarterly changes at annualized rates. 16:Q1 is advance estimate Sources: US Department of Commerce, at http://www.bea.gov/national/index.htm#gdp ; Insurance Information Institute.http://www.bea.gov/national/index.htm#gdp Since the Great Recession ended, even 3% real growth (at an annual rate) in a quarter has been unusual. It happened only 8 times in 27 quarters, but 5 of them were in the 11 most recent quarters.

13. Quarterly US Real GDP for 2016: April 2016 Forecasts 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 13 Real GDP Growth Rate (%) Virtually every one of the 53 forecasts in the Blue Chip survey forecasts steady growth through year-end 2017. Sources: Blue Chip Economic Indicators (4/16); Insurance Information Institute

14. State-by-State Leading Indicators through September 2016 Sources: Federal Reserve Bank of Philadelphia at www.philadelphiafed.org/index.cfm, released Apr 29, 2016; Insurance Information Institute. Next release is May 31, 2016www.philadelphiafed.org/index.cfm 12/01/09 - 9pm 14 Near-term growth forecasts vary widely by state. Strongest growth = blue (over 4.5%); then dark green (1.5%-4.5%); then light green; then beige; weakest = red WI (3.0%) is in the middle of the “strong growth” band

15. State-by-State Leading Indicators through September 2016 Sources: Federal Reserve Bank of Philadelphia at www.philadelphiafed.org/index.cfm, released Apr 29, 2016; Insurance Information Institute. Next release is May 31, 2016www.philadelphiafed.org/index.cfm 12/01/09 - 9pm 15 Near-term growth forecasts vary widely by state. Strongest growth = blue (over 4.5%); then dark green (1.5%-4.5%); then light green (0% to 1.5%); then beige (-1.5% to 0%); weakest = red (under -4.5%); WI (3.0%) is in the middle of the “strong growth” band

16. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 16 New Private Nonresidential Fixed Investment, Quarterly: A New Peak *Quarterly, at seasonally adjusted annual rate Sources: Federal Reserve Board at http://research.stlouisfed.org/fred2/data/PNFIC96.txt. National Bureau of Economic Research (recession dates); Insurance Information Institutes.http://research.stlouisfed.org/fred2/data/PNFIC96.txt Insurance exposures for business investment will continue growing in 2016, and commercial insurance premium volume with them. 12/01/09 - 9pm 16 2016:Q1 at $2179.9 B $ Billions*

17. Real Personal Consumption Expenditures, Chained, Yearly, 2000 – 2015 Millions Even after adjusting for inflation, since the end of the Great Recession consumer spending has been growing at about 2 percent per year, spurring economic growth. Sources: http://www.bea.gov/newsreleases/national/pi/2016/pdf/pi0316_hist.pdf ; Insurance Information Institutehttp://www.bea.gov/newsreleases/national/pi/2016/pdf/pi0316_hist.pdf 12/01/09 - 9pm 17 Recession

18. 18 Labor Market Trends We’re Now Gaining Jobs at a Strong Pace, Mainly in the Private Sector 12/01/09 - 9pm 18

19. Quarterly Change in Nonfarm Employment, 2011 – 2016* Thousands The quarterly pace of job growth has been strong lately. *Seasonally adjusted. 2016:Q1 is Mar 2016 is preliminary data. Sources: US Bureau of Labor Statistics; Insurance Information Institute 12/01/09 - 9pm 19

20. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 20 Unemployment and Underemployment Rates: Still Falling “Headline” unemployment was 5.0% in March 2016. 4% to 6% is “normal.” Source: US Bureau of Labor Statistics; Insurance Information Institute. U-6 was 9.8% in March 2016. January 2000 through March 2016, Seasonally Adjusted (%) Based on the latest readings, it appears that the job market is now close to “normal” 12/01/09 - 9pm 20 U-6 went from 8.0% in March 2007 to 17.5% in October 2009 For U-6, 8% to 10% is “normal.”

21. Labor Market Slack: Elevated Number of Involuntary Part-time Workers 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 21 The “normal” range (since 1992) In less than 18 months, 4.5 million additional people were involuntarily working part time Mar 2016: 6.1 million

22. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 22 Number of “Discouraged Workers”: Elevated, but Dropping Jan 1994 – Mar 2016 Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted. Sources: Bureau of Labor Statistics; National Bureau of Economic Research (recession dates). In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007). Latest reading: 585,000 in Mar. 2016. Thousands A “discouraged worker” in a month did not actively look for work in the prior month for reasons such as --thinks no work available, --could not find work, --lacks schooling or training, --thinks employer thinks too young or old, and other types of discrimination. Normal

23. Growth in Temporary Help Workers vs. All Nonfarm Employment, 2009-2015* *Data are December over prior December except 2016, which is February 2016 over February 2015; January and February 2016 are preliminary; Data are seasonally adjusted Sources: US Bureau of Labor Statistics (CES6056132001), Insurance Information Institute. Percent Change In recent years, employment of temporary workers has increased 2 to 3 times faster than for workers overall There are now 1.16 million more temporary workers than there were in July 2009 (1 st month after the Great Recession)

24. Full-time vs. Part-time Employment, Quarterly, 2003-2016: WC Implications Data are seasonally-adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. The Great Recession shifted employment from full-time to part-time. Full-time employment is finally above its pre-recession peak, but part-time hasn’t receded. Full time, millions Part-time, millions Recession Recession shifted employment growth from full- time to part-time Pre-recession, most new jobs were full-time New full-time peak

25. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 25 Nonfarm Payroll (Wages and Salaries), Quarterly, 2005–2015:Q4 Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.http://research.stlouisfed.org/fred2/series/WASCUR Billions Prior Peak was 2008:Q3 at $6.54 trillion Latest (2015:Q4) was $7.98 trillion, a new peak Recent trough (2009:Q1) was $6.23 trillion, down 5.3% from prior peak 12/01/09 - 9pm 25

26. 12/01/09 - 9pm 26 Payroll Base* WC NWP Payroll vs. WC Net Written Premiums, 1990-2015E *Private employment; Shaded areas indicate recessions. WC premiums are from NCCI through 2014; I.I.I. estimate for 2015. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.http://research.stlouisfed.org/fred2/series/WASCUR Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2016 7/90-3/91 3/01-11/01 12/07-6/09 $Billions WC premium volume dropped two years before the recession began WC net premiums written were down $14B or 29.3% to $33.8B in 2010 WC net premiums written peaked at $47.8B in 2005

27. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 27 Average Weekly Hours of All Private Workers, Mar. 2006—Mar. 2016 *Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.bls.gov/data/#employment The average hours worked per week was 34.4 in Mar. 2016 Hours worked plunged during the recession, affecting payroll exposures (Hours Worked)

28. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 28 The Headline Unemployment Rate Differs Sharply by Educational Attainment Sources: U.S. Bureau of Labor Statistics, series IDs LNS14027 659, 660, 662, and 689. Data are seasonally adjusted and are for people age 25 and older, through Mar. 2016; I.I.I. The unemployment rate for people with a bachelor’s or higher degree never rose above 5.1% (and is now 2.6%). The rate for those who didn’t complete high school never fell below 6.7% (and is now 7.4%). Unemployment Rate Recession 7.4% 5.4% 4.1% 2.6%

29. 29 Historical Analysis of Wisconsin P/C Insurance Markets Analysis by Line and Nearby State Comparisons

30. Profitability: Return on Net Worth 12/01/09 - 9pm 30

31. 31 RNW All Lines: WI vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute 10-Year Average 2005-2014 US: 6.7% WI: 7.8% P/C insurance in Wisconsin has been more profitable than in the U.S. overall in most years of the last decade

32. 32 RNW PP Auto: WI vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 6.2% WI: 8.2% Wisconsin’s PP Auto RNW topped the US overall in every year but one in the last decade

33. PP Auto: 10-Year Average RNW WI & Nearby States 2005-2014 Wisconsin PP Auto profitability is about even with most of its neighbors Source: NAIC, Insurance Information Institute

34. 34 RNW Homeowners: WI vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 3.8% WI: 4.7%

35. Homeowners: 10-Year Average RNW WI & Nearby States Source: NAIC, Insurance Information Institute 2005-2014 Wisconsin HO profitability is above all but one of its four neighbors

36. 36 RNW Commercial Multi-Peril: WI vs. U.S., 2005-2014 Sources: NAIC, Insurance Information Institute Average 2005-2014 US: 6.4% WI: 10.3%

37. Commercial Multiple-Peril: 10-Year Average RNW, WI & Neighbors Source: NAIC, Insurance Information Institute 2005-2014 Wisconsin Commercial Multi-Peril profitability was above 3 of its 4 regional neighbors

38. 38 RNW Workers Compensation: WI vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 6.3% WI: 3.0%

39. Workers Comp: 10-Year Average RNW WI & Nearby States Source: NAIC, Insurance Information Institute 2005-2014 Wisconsin Workers Comp profitability is lower than all of its neighbors

40. Premium Growth 12/01/09 - 9pm 40

41. 41 All Lines DWP Growth: WI vs. U.S., 2005-2014 Source: SNL Financial. (Percent) Average 2005-2014 US: 1.9% WI: 1.8%

42. 42 Comm. Lines DWP Growth: WI vs. U.S., 2005-2014 Source: SNL Financial. (Percent) Average 2005-2014 US: 1.4% WI: 1.6%

43. 43 Personal Lines DWP Growth: WI vs. U.S., 2005-2014 Source: SNL Financial. (Percent) Average 2005-2014 US: 2.6% WI: 2.5%

44. 44 Homeowner’s MP DWP Growth: WI vs. U.S., 2005-2014 Source: SNL Financial. (Percent) Average 2005-2014 US: 4.7% WI: 4.9%

45. 45 Private Passenger Auto Growth: WI vs. U.S., 2005-2014 Source: SNL Financial. (Percent) Average 2005-2014 US: 1.6% WI: 1.4%

46. Competition 12/01/09 - 9pm 46

47. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 47 Brief Background on the HH Index It is the sum of the square of the market shares of sellers It is commonly used by the Justice Department to help determine whether a merger will harm the competitive environment

48. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 48 Examples for the HH Index First, assume a market with 5 sellers, each of which has a 20% market share  Each seller would have a score of 400, and the HH Index would be 2000 Next, assume a market with 10 sellers, each of which has a 10% market share  Each seller would have a score of 100, and the HH Index would be 1000 Now assume a market with 20 sellers, each of which has a 5% market share  Each seller would have a score of 25, and the HH Index would be 500

49. LOB Competition in WI in 2015, as Indicated by the HH Index Line of Business Number of Companies HH Index PP Auto78960.5 HO82911.4 Workers Comp 113440.7 Commercial302278.5 12/01/09 - 9pm 49 Sources: NAIC, via SNL Financial; Insurance Information Institute

50. HH Index for PP Auto in Wisconsin, 2015 Rank (by Market Share) of Insurers writing PP Auto in WI Market Share*HH Index* Top 559.2%891.2 6-1014.5%43.3 11-158.0%13.1 63 others18.3%12.9 Total (100)100.0%960.5 12/01/09 - 9pm 50 *totals might not add to 100% due to rounding

51. 51 Personal Lines Exposure Growth Analysis 12/01/09 - 9pm 51

52. Growth of PP Auto Exposures 12/01/09 - 9pm 52

53. 12/01/09 - 9pm 53 (Millions of Units) Auto/Light Truck Sales Are Forecast to Continue at the 2015 Level Sources: US Department of Commerce; Blue Chip Economic Indicators, 4/16 issue (forecasts); Insurance Information Institute. Yearly car/light truck sales will likely continue at current levels, in part replacing cars that were held onto in 2008-12. But rising interest rates could eventually restrain demand for new vehicles. We’re back to new vehicle sales levels last seen pre-recession

54. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 54 America is Driving More Again: Total Miles Driven*, 1996–2016 *Moving 12-month total. The data are through February 2016, the latest available. Note: Recessions indicated by gray shaded columns. Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm Billions From November 2007 until January 2015, miles driven was below the prior peak for 87 straight months— over 7 years! Previous record was in the early 1980s (39 months). New miles driven records in 2016 From 1996 (and well before), miles driven rose virtually every month, even through recessions.

55. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 55 More People Working and Driving => More Collisions, 2006–2015 Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Information Institute. Number Employed, Millions Overall Collision Claims Per 100 Insured Vehicles When people are out of work, they drive less. When they get jobs, they drive to work, helping drive claim frequency higher. Recession

56. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 56 More Miles Driven => More Collisions, 2006–2015 Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm ); Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Institute for Highway Safety; Insurance Information Institute.http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm Billions of Miles Driven in Prior Year Overall Collision Claims Per 100 Insured Vehicles The more miles people drive, the more likely they are to get in an accident, helping drive claim frequency higher. Recession

57. Growth of Homeowners/Renters Exposures 12/01/09 - 9pm 57

58. 12/01/09 - 9pm 58 (Millions of Units) Forecast: Continued Growth in Private Housing Unit Starts, 1995-2019F Sources: US Department of Commerce (history); Blue Chip Economic Indicators (4/2016), forecasts; Insurance Information Institute. Housing starts are climbing slowly. Recently, the fastest growth is in multi- unit residences. Personal lines exposure will grow, and commercial insurers with Workers Comp, Construction risk exposure and Surety also benefit. Housing unit starts plunged 72% from 2005- 2009, down 1.49 million, to lowest level since records began in 1959 Rising mortgage rates could dampen the demand for new residential construction

59. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 59 Number of Owner-Occupied & Renter-Occupied Housing Units, US, Quarterly, 1990:Q1-2015:Q4 Sources: US Census Bureau at http://www.census.gov/housing/hvs/data/histtabs.html, Table 8; Insurance Information Institute. http://www.census.gov/housing/hvs/data/histtabs.html Since 2004 the number of renter-occupied housing units has grown by over 10 million units (+31.5%), but there has been no growth in the number of owner- occupied housing units in nearly 10 years. When will this end? 12/01/09 - 9pm 59 Millions of Owner- Occupied Housing Units Number of owner-occupied units has been stuck at roughly 75 million units since 2005:Q4 Millions of Renter- Occupied Housing Units Trough in 2004:Q2 at 32.61 million units. Latest renter-occupied was 42.58 million units in 2015:Q4.

60. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 60 I.I.I. Poll: Renters Insurance Source: Insurance Information Institute Annual Pulse Survey. Percentage of Renters Who Have Renters Insurance, 2011-2015 Percentage Of Renters With Renters Insurance Continues to Increase.

61. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 61 Giant Age Cohort (Millenials) Is Approaching Home-Buying Stage Sources: Census Bureau; CoreLogic; Insurance Information Institute. If prior patterns hold, the number of homes bought by current renters, and the number of new homes built, will rise in coming years Number of People in 2016 (Millions) Average Age, 1 st Time Homebuyer Average Age, Repeat Homebuyer Millennial Generation

62. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 62 Growth in Number of Households => Increased Demand for Housing Sources: Census Bureau; CoreLogic; Insurance Information Institute. If prior patterns hold, the number of homes bought by current renters, and the number of new homes built, will rise in coming years Net Change in Number of Occupied Residences (Thousands) A spike, not a trend Housing bubble Bubble burst

63. 63 Catastrophes & U.S. Insured Catastrophe Losses 12/01/09 - 9pm 63

64. 12/01/09 - 9pm 64 Tornadoes, Hail, and Wind Events in Wisconsin, 2015 Sources: http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=WI.http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=

65. 12/01/09 - 9pm 65 Number of Large Hail Storms in Wisconsin, Yearly, 2000-2015 Sources: http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=IL ; Insurance Information Institute.http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state= Is the number of large hail storms that strike Wisconsin each year lower than before? Based on the last 7 years, it seems so. Avg., 2000-2008: 308 Avg., 2009-2015: 118

66. 12/01/09 - 9pm 66 Number of High Wind Events in Wisconsin, Yearly, 2000-2015 Sources: http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=IL ; Insurance Information Institute.http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state= Is there a pattern here? Based on the last 16 years, it certainly doesn’t seem so. Avg., 2000-2015: 528 2012-2015 looks like 2000-2004

67. P/C Industry Homeowners Claim Frequency, Wisconsin, 1997-2013 Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.97; Insurance Information Institute Claims Paid per 100 Exposures Non-CAT claim frequency in Wisconsin is now less than half of what it was 17 years ago

68. P/C Industry HO Average Claim Severity, Wisconsin, 1997-2013 Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” 2015 edition, p. 97; Insurance Information Institute Current dollars

69. P/C Industry HO Average Claim Severity, Inflation-adjusted, Wisconsin, 1997-2013 Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” 2015 edition, p. 97; BLS inflation calculator, with Insurance Information Institute calculations Constant 2013 dollars Non-CAT inflation-adjusted claim severity tripled in the 17 years 1997-2013

70. Investments: The Grim Reality 70 Investment Performance is a Key Driver of Profitability Depressed Yields Will Necessarily Affect Underwriting & Pricing 12/01/09 - 9pm 70

71. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 71 US Treasury Note 10-Year Yields: A Long Downward Trend, 2000–2016* *Monthly, constant maturity, nominal rates. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm; National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.federalreserve.gov/releases/h15/data.htm Yields on 10-Year US Treasury Notes have been below 4% for 8 years Since roughly 80% of P/C bond/cash investments are in 5-to-10-year durations, most P/C insurer portfolios will have low-yielding bonds for years to come. US Treasury yields plunged to historic lows in 2013, then rebounded and sank again 12/01/09 - 9pm 71

72. 12/01/09 - 9pm 72 P/C Insurer Portfolio Yields, 2002-2015 Sources: NAIC, via SNL Financial; Insurance Information Institute. P/C carrier yields have been falling for over a decade, reflecting the long downtrend in prevailing interest rates. Even as prevailing rates rise in the next few years, portfolio yields are unlikely to rise quickly, since low yields of recent years are “baked in” to future returns.

73. Forecasts of Avg. Yield of 10-Year US Treasury Notes 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 73 Yield (%) Virtually every one of the 53 forecasts in the Blue Chip survey forecasts steady growth through year-end 2021. Sources: Blue Chip Economic Indicators (3/16 and 4/16); Insurance Information Institute

74. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 74 Inflation Expectations, 5 Years Ahead* from the Bond Market *Monthly, yields on US Treasury 5-Year Notes minus yields on 5-Year TIPS, through Nov. 2015. **CPI less food and energy. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.federalreserve.gov/releases/h15/data.htm Since roughly 80% of P/C bond/cash investments are in 5-to10-year durations, most P/C insurer portfolios will have low-yielding bonds for years to come. 12/01/09 - 9pm 74

75. 12/01/09 - 9pm 75 P/C Insurers Below-Investment-Grade (BIG) Bonds as a Percent of Total Bonds, 2001-2015:Q3 Sources: NAIC, via SNL Financial; Insurance Information Institute. As a group, P/C carriers have increased the percentage of bond investments in riskier instruments. Since 2006-07, that percentage has risen over 200 basis points (double what it was). As interest rates rise, will this percentage return to pre-recession levels?

76. 12/01/09 - 9pm 76 P/C Insurer Groups Holdings of BIG** Bonds as a Percent of Total Bonds, 2014 *Below Investment Grade Sources: NAIC, via SNL Financial; Insurance Information Institute. There is a wide disparity among insurance groups regarding holdings of below-investment-grade bonds. Some hold none (or almost none); a few have over 10% of their bond portfolio in BIGs. Number of Groups The 67 groups graphed are those with over $3 billion in cash & admitted assets as of year-end P/C industry average

77. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 77 Other Things That Could Affect the Course of Interest Rates Prices of world currencies (the value of the US Dollar vs. the Euro, the Yen, the Yuan and other major world currencies) Prices of a number of commodities (especially oil) Prevailing interest rates in other countries (determined, in part, by those countries’ central banks) The demand for, and the supply of, loanable funds

78. www.iii.org Thank you for your time and your attention! Insurance Information Institute Online: 12/01/09 - 9pm 78