1. 80 Years of Property Losses: What Will it Take to Survive to Next 80 Years? Loss Executives Association Annual Meeting Tampa, FL February 3, 2011 Download at www.iii.org/presentations Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org

2. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 2 Presentation Outline 80 Years: The Dollars and Cents Paying Claims Over the Long Haul: What Does it Take?  Claims Paying Capital & Capacity  Financial Strength Profits, Profitability and Claims Paying Ability Claims Paying and Investment Performance & Volatility  The “Great Recession” as a case study External Challenges  Shifting tort environment Claims Paying Capacity and the Economy  Insurers must maintain the ability to pay claims even in deep recessions Catastrophe Loss Trends  US  Global  Importance of reinsurance in claims paying capacity Q&A

3. 3 CONGRATULATIONS LEA!! 80 YEARS: 1931-2011 7,215,698,210,618 QUIZ: What is the significance of this number?

4. 4 $7,215,698,210,618 ANSWER: This is the dollar value of all claims paid by P/C insurers since 1931.

5. 5 CONGRATULATIONS LEA!! 80 YEARS: 1931-2011 12,539,027,130,890 QUIZ: What is the significance of this number?

6. 6 $12,539,027,130,890 ANSWER: This is the dollar value of claims paid by P/C insurers since 1931, adjusted for inflation* *Adjusted to 2010 dollars by the Insurance Information Institute using BLS CPI-U data.

7. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 7 Dollar Value of Claims Paid by P/C Insurers to Policyholders, 1925–2010E* *1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006. Note: Data are not adjusted for inflation. Sources: Insurance Information Institute research and calculations from A.M. Best data. Since 1925, P/C insurers have paid more than $7.2 trillion in claims to policyholders Claim payouts increased exponentially for decades Claim payouts in recent years are volatile but have reached a jagged plateau Catastrophe losses, underwriting cycle contribute to volatility; Prolonged soft market, recession to plateau $ Billions

8. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 8 Cumulative Value of Claims Paid by P/C Insurers to Policyholders, 1925–2010E* *1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006. Note: Data are not adjusted for inflation. Sources: Insurance Information Institute research and calculations from A.M. Best data. It took 60 years for the industry to pay its first $1 trillion in claims in the years since 1925. Today, the industry pays $1 trillion in claims every 3 to 4 years. 60 years (1925 – 1984) $ Billions 7 years (1991) 4 years (1995) 5 years (2000) 3 years (2003) 3 years (2006) 4 years (2010)

9. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 9 Inflation-Adjusted Dollar Value of Claims Paid by P/C Insurers, 1925–2010E* *1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006. Sources: Insurance Information Institute research and calculations from A.M. Best data. Since 1925, P/C insurers have paid more than $12.6 trillion in claims to policyholders on an inflation-adjusted basis Claim payouts increased exponentially for decades, but more erratically in the post-1980 era On an inflation-adjusted basis, claims paid have fallen to 1990s levels, reflecting improved underwriting results, exposure loss during the “Great Recession” and leakage to alternative markets $ Billions

10. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 10 Cumulative Value of Inflation-Adjusted Claims Paid by P/C Insurers, 1925–2010E* *1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006. Sources: Insurance Information Institute research and calculations from A.M. Best data. Adjusted for inflation, it took 36 years for the industry to pay its first $1 trillion in claims in the years since 1925. Today, the industry pays $1 trillion in claims every 2 to 3 years after adjusting for inflation. 36 years (1925 – 1961) $ Billions 9 years (1970) 7 years (1977) 5 years (1982) 4 years (1986) 4 years (1990) 3 years (1993) 3 years (1996) 4 years (2000) 2 years (2002) 3 years (2005) 3 years (2008)

11. 11 What Does it Take to Pay Out $1 Trillion Every 3-4 Years? Financial Strength Was the Key to the Past 80 Years— It is the Key to the Next 80 As Well

12. Capital/Policyholder Surplus (US) 12 Total Surplus Exhibits Little Cyclicality, While Surplus Leverage Ratios Influence Cycle

13. US Policyholder Surplus: 1975–2010* * As of 9/30/10; **Calculated using annualized net premiums written based on 9-month 2010 data. 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 $0.77:$1 as of 9/30/10, A Record Low (at Least in Recent History)** Surplus as of 9/30/10 was a record $544.8B, up from $437.1B at the crisis trough at 3/31/09. Prior peak was $521.8 as of 9/30/07. Surplus as of 9/30/10 is now 4.4% above 2007 peak; Crisis trough was as of 3/31/09  16.2% below 2007 peak.

14. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 14 Policyholder Surplus, 2006:Q4–2010:Q3 Sources: ISO, A.M.Best. ($ Billions) 2007:Q3 Previous Surplus Peak Quarterly Surplus Changes Since 2007:Q3 Peak 09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%) 09:Q3: -$31.0B (-5.9%) 09:Q4: -$10.3B (-2.0%) 10:Q1: +$18.9B (+3.6%) 10:Q2: +$8.7B (+1.7%) 10:Q3: +$23.0B (+4.4%) Surplus set a new record in 2010:Q3* *Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010. The Industry now has $1 of surplus for every $0.77 of NPW—the strongest claims- paying status in its history.

15. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 15 * 2010 NWP and Surplus figures are % changes as of Q3:10 vs Q3:09. Sources: A.M. Best, ISO, Insurance Information Institute Historically, Hard Markets Follow When Surplus “Growth” is Negative* (Percent) The Relatively Fast Growth of Claims Paying Capital (Surplus) Has Increased the Financial Strength of the Industry Over Time, Enabling it to Better Withstand Cyclical, Financial, Economic and Catastrophe Shocks Avg. Annual Growth: 1978-2010* PHS: 9.8% NWP: 5.7% Growth in claims paying capital has great exceeded that of underling premium growth for decades

16. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 16 Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989* * Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event ** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9% Source: PCS; Insurance Information Institute The Financial Crisis at its Peak Ranks as the Largest “Capital Event” Over the Past 20+ Years (Percent)

17. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 17 Paid-in Capital, 2005–2010:9M Source: ISO. ($ Billions) Paid-in capital for insurance operations in 2009:9M was $3.9B. In 2010:9M it was a record $23.8B In 2010:H1 One Insurer’s Paid-in Capital Rose by $22.5B as Part of an Investment in a Non-insurance Business $23.8 The p/c insurance industry has been able to quickly attract large amounts of capital after natural disaster (2004/2005) and financial crises (2008) alike. The ability to attract and retain capital is critical to claims paying over the long run.

18. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 18 Global Reinsurance CapacitySource of Decline in 2008 Global Reinsurance Capacity Shrank in 2008, Mostly Due to Investments Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute estimate for 2009. Global Reinsurance Capacity Fell by an Estimated 17% in 2008 Change in Unrealized Capital Losses Realized Capital Losses Hurricanes

19. Financial Strength is Synonymous With Claims Paying Ability 19 Industry is Resilient but Cyclical Pattern in P-C Impairment History is Directly Tied to Underwriting, Reserving & Pricing

20. P/C Insurer Impairments, 1969–2009 Source: A.M. Best; Insurance Information Institute. The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets 5 of the 11 are Florida companies (1 of these 5 is a title insurer)

21. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 21 P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009 Source: A.M. Best; Insurance Information Institute 2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969 Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08

22. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 22 Reasons for US P/C Insurer Impairments, 1969–2008 Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009 Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline. Investment Catastrophe Losses Play a Much Smaller Role Deficient Loss Reserves/ Inadequate Pricing Reinsurance Failure Rapid Growth Alleged Fraud Catastrophe Losses Affiliate Impairment Investment Problems Misc. Sig. Change in Business

23. 23 The Ability to Pay Claims Begins With Sustained Profitability Profits Are Volatile but Resilient in the P/C Insurance Industry

24. P/C Net Income After Taxes 1991–2010:Q3 ($ Millions) 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS 1 = 5.8% 2010:Q3 ROAS = 6.7% P-C Industry 2010:Q3 profits were$26.7B vs.$16.4B in 2009:Q3, due mainly to $4.4B in realized capital gains vs. -$9.6B in previous realized capital losses * ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS for 2010:Q3 and 4.6% for 2009. 2009:Q3 net income was $29.8 billion excluding M&FG. Sources: A.M. Best, ISO, Insurance Information Institute

25. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 25 ROE: Property/Casualty Insurance, 1987–2010E* * Excludes Mortgage & Financial Guarantee in 2008 - 2010. Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3. P/C Profitability Is Both by Cyclicality and Ordinary Volatile Hugo Andrew Northridge Lowest CAT Losses in 15 Years Sept. 11 Katrina, Rita, Wilma 4 Hurricanes Financial Crisis* (Percent)

26. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 26 ROE vs. Equity Cost of Capital: U.S. P/C Insurance:1991-2010:9-Months* * Return on average surplus in 2008-2010 excluding mortgage and financial guaranty insurers. Source: The Geneva Association, Insurance Information Institute -13.2 pts +1.7 pts +2.3 pts -9.0 pts -6.4 pts -3.2 pts The P/C Insurance Industry Fell Well Short of Its Cost of Capital in 2008 but Narrowed the Gap in 2009 and 2010 US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from 1991 to 2002, but on Target or Better 2003-07, Fell Short in 2008-2010 The Cost of Capital is the Rate of Return Insurers Need to Attract and Retain Capital to the Business (Percent) -2.7 pts

27. A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE * 2009 and 2010:Q3 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty 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

28. Claims Paying Ability Must Be Maintained Over the Cycle 28 Industry’s Ability to Pay Claims Was Unimpaired by Protracted Period of Weak/Negative Growth

29. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 29 Soft Market Persisted in 2010 but May Be Easing: Relief in 2011? (Percent) 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. NWP was up 0.8% through 10:Q3 vs. -4.5% through 09:Q3

30. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 30 P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter Sources: ISO, Insurance Information Institute. Finally! Back-to-back quarters of net written premium growth (vs. the same quarter, prior year) The long- awaited uptick: mainly personal lines

31. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 31 Net Written Premium Growth by Segment: 2008-2011F Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted again in 2010 and but will stabilize in 2011 Sources: A.M. Best; Insurance Information Institute.

32. Claims Paying Ability Must Be Maintained Irrespective of Investment Climate 32 Investment Volatility Shouldn’t Matter to Policyholders

33. Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q3 1 In 2008, Investment Gains Fell by 50% Due to Lower Yields and Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income Investment Gains Recovered Significantly in 2010 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) 2009:Q3 gain was $29.3B Investment gains in 2010 are on track to be their best since 2007

34. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 34 P/C Insurer Net Realized Capital Gains, 1990-2010:Q3 Sources: A.M. Best, ISO, Insurance Information Institute. Realized Capital Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE and Were a Major Driver of Its Recovery in 2010 ($ Billions) Capital losses have turned to capital gains, aiding earnings

35. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 35 Treasury Yield Curves: Pre-Crisis (July 2007) vs. December 2010 Treasury yield curve is near its most depressed level in at least 45 years, though longer yields rose in late 2010 as economy improves. Investment income is falling as a result. The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Further Depress Rates in the 7 to 10-Year Maturity Range Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute. QE2 Target

36. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 36 Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline *Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only Source: A.M. Best; Insurance Information Institute. Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

37. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 37 *Net admitted assets. Sources: NAIC; Insurance Information Institute research. Invested assets totaled $1.26 trillion Generally, insurers invest conservatively, with over 2/3 of invested assets in bonds Only 18% of invested assets were in common or preferred stock Portfolio Facts as of 12/31/2009 Bonds Common & Preferred Stock As of December 31, 2009 Cash & Short-term Investments Other Distribution of P/C Insurance Industry’s Investment Portfolio

38. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 38 2011 Financial Overview About Half of the P/C Insurance Industry’s Bond Investments Are in Municipal Bonds Sources: NAIC, via SNL Financial; Insurance Information Institute research. Investments in “Political Subdivision [of states]” bonds were $102.5 billion Investments in “States, Territories, & Possessions” bonds were $58.9 billion Investments in “Special Revenue” bonds were $288.2 billion All state, local, and special revenue bonds totaled 48.2% of bonds, about 35.7% of total invested assets Bond Investment Facts as of 12/31/09 U.S. Government Special Revenue As of December 31, 2009 States, Terr., etc. Industrial Foreign Govt Political Subdivisions

39. 2011 Financial Overview When P/C Insurers Invest in Higher Risk Bonds, It’s Corporates, Not Munis Data are as of year-end 2009. Sources: SNL Financial; Insurance Information Institute. The NAIC’s Securities Valuation Office puts bonds into one of 6 classes: class 1 has the lowest expected impairments; successively higher numbered classes imply increasing impairment likelihood.

40. 40 Strength Through Underwriting: Underwriting Profits Support Claims Paying Capability When Investments Can’t

41. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 41 P/C Insurance Industry Combined Ratio, 2001–2010:Q3* * Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2 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 Lower CAT Losses, More Reserve Releases

42. Underwriting Gain (Loss) 1975–2010:Q3* * Includes mortgage and financial guarantee insurers. Sources: A.M. Best, ISO; Insurance Information Institute. Large Underwriting Losses Are NOT Sustainable in Current Investment Environment The industry recorded a $6.2B underwriting loss in 2010:Q3 compared to $3.2B in 2009:Q3 Cumulative underwriting deficit from 1975 through 2009 is $445B ($ Billions)

43. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 43 Number of Years with Underwriting Profits by Decade, 1920s–2000s * 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit. Note: Data for 1920–1934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data. Number of Years with Underwriting Profits Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) – But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

44. 44 Performance by Segment: Commercial/Personal Lines

45. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 45 Calendar Year Combined Ratios by Segment: 2008-2011F Sources: A.M. Best. Insurance Information Institute. Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting performance related to the prolonged commercial soft market Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate

46. Legal Liability & Tort Environment Can Stress Claims Paying Ability 46 Tort Trends Have a Major Impact on the Price/Availability of Insurance

47. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 47 Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical ($ Billions) Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A Tort Costs Have Remained High but Relatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as the Economy Expands

48. Cost of US Tort System ($ Billions) * Restated in 2009 dollars, based on CPI. Source: Towers Watson, 2010 Update on US Tort Cost Trends. Per capita “tort tax” was $808 in 2009, up from $793 in 2000* Tort costs consumed 1.74% of GDP in 2009, down from 2.21% in 2003

49. Business Leaders Ranking of Liability Systems in 2010 Best States 1.Delaware 2.North Dakota 3.Nebraska 4.Indiana 5.Iowa 6.Virginia 7.Utah 8.Colorado 9.Massachusetts 10.South Dakota Worst States 41.New Mexico 42.Florida 43.Montana 44.Arkansas 45.Illinois 46.California 47.Alabama 48.Mississippi 49.Louisiana 50.West Virginia Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute. New in 2010 North Dakota Massachusetts South Dakota Drop-offs Maine Vermont Kansas Newly Notorious New Mexico Montana Arkansas Rising Above Texas South Carolina Hawaii Midwest/West has mix of good and bad states.

50. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 50 The Nation’s Judicial Hellholes: 2010 Source: American Tort Reform Association; Insurance Information Institute South Florida West Virginia Illinois Cook County Nevada Clark County Watch List Madison County, IL Atlantic County, NJ St. Landry Parish, LA District of Columbia NYC & Albany, NY St. Clair County, IL Dishonorable Mention MI Supreme Court City of St. Louis CO Supreme Court California Los Angeles and Humboldt Counties Philadelphia

51. Excess Liability Market Capacity North America ($ Billions) Source: Marsh, 2008 Limits of Liability Report

52. Claims Paying Ability and the Economy 52 Insurers Must Have the Ability to Pay Claims Even in Times of Economic Turmoil and Panic

53. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 53 US Real GDP Growth* *Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 1/11; Insurance Information Institute. Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly Real GDP Growth (%) Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8% Economic growth projections for 2011 have been revised upward. This is a major positive for insurance demand and exposure growth.

54. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 54 Inflation Rate (CPI-U), 1925–2010* Sources: US Bureau of Labor Statistics; Insurance Information Institute Rate of inflation can dramatically impact claim severities and trends Deflation during the Great Depression Very low inflation during the “Great Recession” Inflation Rate (%) High inflation during the 1970s and early 1980s increased claim severities significantly

55. 55 Capital/Capacity Are Not Enough Risk Management Matters

56. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 56 Frequency: 1926–2008 A Long-Term Drift Downward Note: Recessions indicated by gray bars. Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research Manufacturing – Total Recordable Cases Rate of Injury and Illness Cases per 100 Full-Time Workers

57. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 57 Examples Where Attention Risk Management Reduces Claims Workplace Safety Automobile and Highway Safety Aviation Marine Health & Environmental Safety Food Safety Medicine Energy Corporate Governance (D&O)

58. 58 Catastrophic Loss – Catastrophe Losses Trends Are Trending Adversely

59. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 59 US Insured Catastrophe Losses *Estimate from Munich Re. 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. 2010 CAT Losses Were Close to “Average” Figures Do Not Include an Estimate of Deepwater Horizon Loss $100 Billion CAT Year is Coming Eventually First Half 2010 CAT Losses Were Down 19% or $1.4B from first half 2009 ($ Billions) 2000s: A Decade of Disaster 2000s: $193B (up 117%) 1990s: $89B

60. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 60 Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2010E Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers. Source: ISO; Insurance Information Institute estimate for 2010. The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades Avg. CAT Loss Component of the Combined Ratio by Decade 1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 Combined Ratio Points

61. Number Geophysical (earthquake, tsunami, volcanic activity) Climatological (temperature extremes, drought, wildfire) Meteorological (storm) Hydrological (flood, mass movement) Natural Disasters in the United States, 1980 – 2010 Number of Events (Annual Totals 1980 – 2010) Source: MR NatCatSERVICE 61 There were a record 247 natural disaster events in the US in 2010

62. For the second year in a row, insured losses due to weather perils in the U.S. in 2010 were the highest on record for a year without a hurricane landfall. Insured Losses Due to Weather Perils in the U.S.: 1980 – 2010 Sources: MR NatCatSERVICE, Property Claims Services 62 © 2011 Munich Re (Tropical Cyclone, Thunderstorm, and Winter Storm only)

63. Significant Natural Catastrophes, 2010 Sources: MR NatCatSERVICE, † - Property Claims Services (PCS) 63 ($1 Billion + Economic Loss and/or 50 Fatalities)

64. Source: MR NatCatSERVICE Natural Disasters in the United States, 2010 (Insured Losses) 64

65. Sources: MR NatCatSERVICE Significant Natural Catastrophes, 1950 – 2010 Number of Events ($1 billion economic loss and/or 50 fatalities) 65 There were 5 significant natural catastrophes in the US in 2010

66. Significant Natural Catastrophes, 1950 – 2010 Losses ($1 billion economic loss and/or 50 fatalities) Sources: MR NatCatSERVICE 66 Overall losses (insured and uninsured) from significant US catastrophes totaled $8.6 billion. Of that were $6.3 billion was insured

67. Number of U.S. Landfalling Tropical Cyclones,1900 – 2010 Source:NOAA; Munich Re 67 Only 1 tropical cyclone, Bonnie, made landfall in the US in 2010

68. Insured U.S. Tropical Cyclone Losses, 1980 – 2010 Sources: Property Claims Service, MR NatCatSERVICE: NFIP 68 The current 5-year average (2006-2010) insured tropical cyclone loss is $4.6 billion, down $19 billion from the previous 5-year average

69. Source: Property Claims Service, MR NatCatSERVICE U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals) 69 Insured winter storm losses in 2010 are one of the top five in US history, totaling $2.6 billion in 2010

70. U.S. Thunderstorm Loss Trends, 1980 – 2010 (Annual Totals) Source: Property Claims Service, MR NatCatSERVICE 70 Thunderstorm losses in 2010 totaled $9.5 billion, the 3 rd highest ever Average thunderstorm losses have now quintupled since the early 1980s Hurricanes get all the headlines, but thunderstorms are consistent producers of large scale loss

71. U.S. Tornado Count, 2010 Source: NOAA 71 There were 1483 tornadoes in the US in 2010, slightly above average

72. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 72 Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008* ($ Billions) * All figures (except 2006-2008 loss) have been adjusted to 2005 dollars. Source: PCS division of ISO. Texas Accounted for 10% of All US Insured CAT Losses from 1980-2008: $57.1B out of $297.9B Florida Texas Louisiana Rest of US

73. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 73 Top 12 Most Costly Disasters in US History (Insured Losses, 2009, $ Billions) Sources: PCS; Insurance Information Institute inflation adjustments. 8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004; 8 of the Top 12 Disasters Affected FL Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US and World History

74. Share of Losses Paid by Reinsurers for Major Catastrophic Events Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute. Reinsurance plays a very large role in claims payouts associated with major catastrophes

75. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 75 Total Value of Insured Coastal Exposure (2007, $ Billions) Source: AIR Worldwide $895B Insured Coastal Exposure in Texas in 2007 In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with $2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B in insured coastal exposure The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

76. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 76 US Residual Market Exposure to Loss Source: PIPSO; Insurance Information Institute Hurricane Andrew 4 Florida Hurricanes Katrina, Rita, and Wilma In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B in 1990 to $696.4B in 2008 ($ Billions)

77. 77 Global Catastrophe Loss Trends Claims Paying Capacity Will Need to Increase in the Future if Current Disaster Trends Continue

78. 20102009 Average of the last 10 years 2000-2009 Average of the last 30 years 1980-2009 Number of events950900785615 Overall losses (US$m) 130,00060,000110,00095,000 Insured losses (US$m) 37,00022,00035,00023,000 Fatalities295,00011,00077,00066,000 Natural Catastrophes, 2010 Overview and comparison with previous years Source: Geo Risks Research, NatCatSERVICE 78 The number and cost of natural catastrophes on a global scale was far above average in 2010

79. Geophysical events (earthquake, tsunami, volcanic activity) Meteorological events (storm) Hydrological events (flood, mass movement) Climatological events (extreme temperature, drought, wildfire) Selection of significant loss events (see table) Natural catastrophes Volcanic eruption Island, March/April Heat wave/ Wildfires Russia, July-Sept. Severe storms, floods United States, 13 -15 March Earthquake Haiti, 12 Jan. Hurricane Karl, floods Mexico, 15-21 Sept. Earthquake, tsunami Chile, 27 Feb. Winter Storm Xynthia, storm surge Western Europe, 26-28 Feb. Flash floods France, 15 June Floods, flash floods Pakistan, July-Sept. Earthquake China, 13 April Floods Eastern Europe, 2-12 June Floods, flash floods, landslides China, 13-29 June Landslides, flash floods China, 7 Aug. Hailstorms, severe storms Australia, 22 March/6-7 March Earthquake New Zealand, 4 Sept. Severe storms, hail United States, 12-16 May Severe storms, tornadoes, floods United States, 30 April – 3 May Typhoon Megi China, Philippines, Taiwan, 18-24 Oct. Floods Australia, Dec. Natural Catastrophes, 2010 950 loss events Source: Geo Risks Research, NatCatSERVICE 79 Insurance is a global business and claims paying ability is interconnected via reinsurance markets

80. Natural Catastrophes, 2010 The five costliest natural catastrophes for the insurance industry DateRegionEventFatalities Overall losses US$m Insured losses US$m 27.2.2010ChileEarthquake, tsunami52030,0008,000 3.9.2010 New Zealand Earthquake (Preliminary estimation October 2010) 3,700* 3,300* 26-28.2.2010EuropeWinter Storm Xynthia656,1003,100 12-16.5.2010USASevere storm, hail32,7002,000 4-6.10.2010USA Severe storm, tornadoes 2,0001,450 * Loss estimation in progress Source: Geo Risks Research, NatCatSERVICE 80

81. 41% Natural Catastrophes, 2010 Insured losses US$ 37bn - % distribution by continent 22% 15% <1% 2% 20% Source: Geo Risks Research, NatCatSERVICE 81 US accounts for the greatest share of losses over the past 30 years, but more losses in the future will originate in developing countries

82. 66% 20% 9% 2% 3% <1% Source: Geo Risks Research, NatCatSERVICE 82 Natural Catastrophes, 1980 - 2009 US accounts for the greatest share of losses over the past 30 years, but more losses in the future will originate in developing countries

83. Costliest Natural Catastrophes Since 1950 Rank by insured losses - in values of 2010 YearEventRegion Insured loss US$m, 2010 values 2005Hurricane KatrinaUSA69,900 1992Hurricane AndrewUSA26,500 1994EQ NorthridgeUSA22,500 2008Hurricane IkeUSA, Caribbean18,700 2004Hurricane IvanUSA, Caribbean16,000 2005Hurricane WilmaUSA, Mexico14,000 2005Hurricane RitaUSA13,500 1991Typhoon MireilleJapan11,200 2004Hurricane CharleyUSA, Caribbean9,250 1989Hurricane HugoUSA, Caribeean9,000 1990Winter Storm DariaEurope8,500 2010EarthquakeChile8,000 Source: Geo Risks Research, NatCatSERVICE 83 © 2011 Munich Re

84. Natural Catastrophes Worldwide, 1980 – 2010 (Number of events with trend) Number Meteorological events (Storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) Geophysical events (Earthquake, tsunami, volcanic eruption) Source: Geo Risks Research, NatCatSERVICE 84 © 2011 Munich Re Increased claims paying capacity will be required on a global scale if current trends continue (as is expected)

85. Natural Catastrophes Worldwide, 1980 – 2010 Overall and Insured Losses (US$bn) Overall losses (in 2010 values) Insured losses (in 2010 values) Average of the Last 10 Years Overall Loss US$ 110bn Insured Loss US$ 35bn Average of the Last 10 Years Overall Loss US$ 110bn Insured Loss US$ 35bn Source: Geo Risks Research, NatCatSERVICE 85 © 2011 Munich Re

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