1. Personal Lines P-C Insurance Markets: Trends, Challenges & Opportunities for 2012 & Beyond Insurance Information Institute January 31, 2012 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 Personal Lines Growth Overview  Auto, Home: US and by State  Average Premium/Expenditures Personal Lines Growth Drivers  Exposure, Pricing Factors Personal Lines Profitability Analysis Catastrophe Loss Trends: US & Global Impacts Reinsurance Market Overview & Outlook Cyclical Drivers in Personal Lines  Loss as a Cyclical Driver Private Passenger Auto Performance Distribution Trends P/C Financial Overview & Outlook: The Role of Cyclicality  Profitability  Premium Growth  Capital, Capacity and Financial Strength  Underwriting Performance  Investment Performance Financial Crisis, Recession & Recovery: P/C Insurer Impacts Regulatory Environment “Report Card” Q&A

3. 3 Personal Lines Growth Analysis Growth Trajectories Differ Substantially by Line, by State and Over Time

4. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 4 Distribution of Direct Premiums Written by Segment/Line, 2010 Sources: A.M. Best; Insurance Information Institute research. Personal/Commercial lines split has been about 50/50 for many years; Personal Lines overtook Commercial Lines in 2010 Pvt. Passenger Auto is by far the largest line of insurance and is currently the most important source of industry profits Billions of additional dollars in homeowners insurance premiums are written by state- run residual market plans Distribution Facts Commercial Lines $226.8B/49% 2010 Pvt. Pass Auto $165.0B/36% Homeowners $68.2B/15%

5. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 5 Auto & Home vs. All Lines, Net Written Premium Growth, 2000–2013F Sources: A.M. Best (historical); Insurance Information Institute (2011F-2013F). Average 2000-2010 Auto = 2.8 Home = 6.4% All Lines = 3.6% While homeowners insurance has grown faster than auto over the past decade, auto is generally more profitable

6. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 6 PP Auto premiums written have been basically flat in recent years to the weak economy impacting new vehicle sales, car choice, and increased price sensitivity among consumers, though growth is returning to the market Sources: A.M. Best; Insurance Information Institute. Private Passenger Auto Insurance Net Written Premium, 2000–2010 $ Billion

7. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 7 Sources: A.M. Best; Insurance Information Institute. $ Billion In contrast to flat PP Auto NPW, Commercial auto premiums are down 22.0% since 2005 due to soft market conditions in commercial lines and negative exposure trends Commercial Auto Insurance Net Written Premium, 2000–2010

8. 8 Percent Change in DPW: Pvt. Pass. Auto by State, 2005-2010 Sources: SNL Financial LC.; Insurance Information Institute. Top 25 States Texas was the fastest growing state between 2005 and 2010

9. 9 Sources: SNL Financial LC.; Insurance Information Institute. Massachusetts saw the biggest drop in premiums written, due in large part to recent reforms that increased competition and lowered overall rate levels Percent Change in DPW: Pvt. Pass. Auto by State, 2005-2010 Bottom 25 States

10. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 10 Homeowners Insurance Net Written Premium, 2000–2010 Sources: A.M. Best; Insurance Information Institute. $ Billions Homeowners insurance NWP continues to rise (up 86.5% 2000-2010) despite very little unit growth in recent years. Reasons include rate increases, especially in coastal zones, ITV endorsements (e.g., “inflation guards”), and inelastic demand

11. 11 Average Premiums For Home Insurance By State, 2009* (1) *Latest available. (1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling. Source: NAIC; Insurance Information Institute. Top 25 States

12. 12 Average Premiums For Home Insurance By State, 2009* (1) (1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling. Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC. Bottom 25 States

13. 13 *Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners. Top 25 States (Percent) Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009

14. 14 *Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners. (Percent) Bottom 25 States Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009

15. 15 Personal Lines Growth Drivers Rate is Presently a Bigger Driver than Exposure

16. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 16 Monthly Change* in Auto Insurance Prices, 1991–2011* *Percentage change from same month in prior year; through December 2011; seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. Cyclical peaks in PP Auto tend to occur approximately every 10 years (early 1990s, early 2000s and likely the early 2010s) “Hard” markets tend to occur during recessionary periods Pricing peak occurred in 2010 at 5.1%, falling to 3.6% in 2011

17. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 17 Monthly Change* in Auto Insurance Prices, January 2005 - December 2011 (Percent Change from same month, prior year) *Percentage change from same month in prior year, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute Auto Insurance Price Increases Have Averaged 5.1% in 2010 over 2009, After Averaging 4.5% in 2009 over 2008. Underwriting performance remained strong even when prices were flat or falling due to improvements in underlying frequency and severity trends PPA Auto, like most p/c lines, exhibits strong cyclicality in pricing. Prices rose from 2000 to late 2005, were flat/falling in 2006 and 2007 before beginning to rise gain in 2008. Pricing weakened materially in 2011 and growth now lags homeowners

18. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 18 Average Expenditures on Auto Insurance Countrywide Auto Insurance Expenditures Decreased by 0.8% in 2008 and 0.5% in 2009 and Increased 3.0% in 2010 (est.) * Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute estimate for 2010 based on CPI and other data. The average expenditure on auto insurance is lower today than it was in 2003

19. 19 Average Expenditures For Auto Insurance By State, 2009 Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle. Source: © 2010 National Association of Insurance Commissioners. Top 25 States

20. 20 Average Expenditures For Auto Insurance By State, 2009 Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle. Source: © 2010 National Association of Insurance Commissioners. Bottom 25 States

21. 21 *Average auto insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners. Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009 Top 25 States (Percent)

22. 22 *Average auto insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners. (Percent) Bottom 25 States Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009

23. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 23 (Millions of Units) Auto/Light Truck Sales, 1999-2022F Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute. Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector. New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is still far below 1999-2007 average of 17 million units, but a recovery is underway. Job growth and improved credit market conditions will boost auto sales in 2012 and beyond

24. 24 Number of Insured Vehicles in the US, 2000-2009* *Latest available as of Nov. 2011. Source: Automobile Insurance Plans Service Office. The Number of Insured Passenger Vehicles Stopped Growing During the Economic Downturn. Growth Has Likely Returned.

25. Do Changes in Miles Driven Affect Auto Collision Claim Frequency? Sources: Federal Highway Administration ( http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 2nd Qtr. 2011, published Sep. 30, 2011 and earlier reports. *2011 ISO figure is for 12 months ending 6/30/2011; FHA data is for 12 months ending Sep. 2011. http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100 People are driving less in 2011 (-1.3% Sept. 2011 vs, Sept. 2010), and frequency is flat

26. Source: ISO, US DOT. Oct. 17, 1973: Arab oil embargo begins Frequency Impacts Collision: -7.7% PD: -9.5% BI: -13.3% March 17, 1974: Arab oil states announce end to embargo Driving Stats  Gas prices rose 35-40%  Miles driven fell 6.7% in 1974 Frequency began to rebound almost immediately after the embargo ended Auto Insurance: Claim Frequency Impacts of Energy Crisis/Recession of 1973/74

27. Source: ISO. Severity Impacts Collision: - 7.5% PD: +15.9% BI: N/A* Driving Stats  Gas prices rose 35-40%  Miles driven fell 6.7% in 1974 Oct. 17, 1973: Arab oil embargo begins March 17, 1974: Arab oil states announce end to embargo Collision severity began to rebound almost immediately after the embargo ended; PD accelerated as inflation rose; No discernable trend change in BI. Auto Insurance: Claim Severity Impacts of Energy Crisis/Recession of 1973/74

28. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 28 (Millions of Units) New Private Housing Starts, 1990-2022F Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute. Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety New home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959 The plunge and lack of recovery in homebuilding and in construction in general is holding back payroll exposure growth Job growth, improved credit market conditions and demographics will eventually boost home construction

29. Average Square Footage of Completed New Homes in U.S., 1973-2011* *2011 figure is weighted average square feet of completed homes in first three quarters of 2011 Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.http://www.census.gov/const/www/quarterly_starts_completions.pdf Square Ft The trend toward building larger homes reversed from2008 - 2010, affecting exposure growth beyond the decline in number of units built. Rising again in 2011. The average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions 29 The average size of completed new homes fell by 147 square feet (5.75%) from 2008-2010. This was the largest recession-based drop in nearly four decades.

30. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 30 Value* of Construction Put In Place *seasonally adjusted annual rate Source: http://www.census.gov/const/C30/release.pdfhttp://www.census.gov/const/C30/release.pdf Since the recession started,private residential and nonresidential construction together are down $300 billion (annual rate) – a drop of 38%. This affects property, surety, and other construction-related exposures. Billions Total Construction Spending (Annual Rate) Dec 2007: $1,109.0B Nov 2010: $ 810.2 B

31. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 31 State Population Growth Rate Projections, 2010-2020* *based on 2000 census. Source: http://www.census.gov/population/www/projections/projectionsagesex.html Table 7http://www.census.gov/population/www/projections/projectionsagesex.html The Mountain West region is projected to grow the most from now to 2020 (up 17.6%), followed by the South Atlantic (up 14.5%) and Pacific (up 11.2%). The Mid-Atlantic is projected to be the slowest-growing region (up 1.9%). Projected Population Growth Highest Growth Rate States Lowest Growth Rate States U.S. overall: +8.7%

32. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 32 FLORIDA CASE STUDY: Weak Population Growth, Slow Household Formation Hurt Personal Lines Exposure Gains Thousands FL’s Construction Sector, One of Most Critical of FL’s Growth Engines, Remains in a Deep Recession Household formation slowed faster than population growth, suggesting people are consolidating households as the state’s foreclosure crisis continues Source: Dept. of Commerce (historical); Wells Fargo Securities (FL forecasts) as of September 2011; Insurance Information Institute.

33. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 33 FL Housing Permits: Multi-Family Unit Growth Poised to Soar, Single-Family Weak Annual Change, 2007 through 2012F FL’s Construction Sector, One of Most Critical of FL’s Growth Engines, Remains in a Deep Recession Single-family home construction in 2012 is expected to be barely half what it was pre-crisis. Multi-family dwelling great is expected to rise by 68% in 2012 as people shun homeownership or it remains beyond their means Source: Dept. of Commerce (historical); Wells Fargo Securities (FL forecasts) as of September 2011; Insurance Information Institute.

34. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 34 Average Premium for Home Insurance Policies** * Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers. Source: NAIC, Insurance Information Institute estimates 2010-2012 based on CPI and other data. Home insurance premiums are rising in response to higher catastrophe losses

35. 35 Sources: SNL Financial LC.; Insurance Information Institute. Hawaii was the fastest growing state between 2005 and 2010 Percent Change in DPW: Homeowners, by State, 2005-2010 Top 25 States

36. 36 Sources: SNL Financial LC.; Insurance Information Institute. Michigan was the slowest growing state between 2005 and 2010 Percent Change in DPW: Homeowners, by State, 2005-2010 Bottom 25 States

37. 37 U.S. Residual Market Exposure to Loss ($ Billions) Source: PIPSO; Insurance Information Institute (I.I.I.). ($ Billions) In the 21-year period from 1990 through 2010, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7 billion in 1990 to $757.9 billion in 2010. Hurricane Andrew 4 Florida Hurricanes Katrina, Rita and Wilma

38. U.S. Residual Market: Total Policies In-Force (1990-2010) (000) Source: PIPSO; Insurance Information Institute (000) Hurricane Andrew 4 Florida Hurricanes Katrina, Rita and Wilma In the 21-year period between 1990 and 2010, the total number of policies in-force in the residual market (FAIR & Beach/Windstorm) Plans has more than tripled.

39. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 39 Hurricanes, Insolvencies and Insured Losses, 1984-2011 Insured Loss ($ Bill, 2009 Dollars) No. of Insolvent Insurers Sources: Florida TaxWatch, Risk & Reform: A Florida TaxWatch Analysis of Florida’s Property Insurance System, November 2011, citing the Insurance Information Institute and the Florida Hurricane Fact File.

40. 40 Personal Lines Profitability Analysis Significant Variability Over Time and Across States

41. 41 Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2010* *Latest available. **Excluding 1992, the Hurricane Andrew, produces a homeowners RNW of 3.5%. Sources: NAIC. (Percent) Average RNW: 1990-2010* All P-C Lines: 7.9% PP Auto: 8.9% Homeowners: 0.7%** Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues Hurricane Andrew

42. 42 Return on Net Worth: All P-C Lines vs. Pvt. Pass. Auto, 1990-2010* *Latest available. Sources: NAIC. (Percent) Average RNW: 1990-2010* All P-C Lines: 7.9% PP Auto: 8.9% Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13 of the 21 Years from 1990-2010 (Inclusive)

43. 43 Return on Net Worth: All P-C Lines vs. Homeowners, 1990-2010* *Latest available. **Excluding Hurricane Andrew (1992); including 1992 produces an average homeowners RNW of 0.7%. Sources: NAIC. (Percent) Average RNW: 1990-2009* All P-C Lines: 7.9% Homeowners: 3.5%** Homeowners Insurance Is Considerably More Volatile than the Market Overall Due to Coastal Exposure and Interior Wind/Hail Events

44. 44 *Latest available. Sources: NAIC. Hawaii was the most profitable state for auto insurers from 2001-2010 Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*) Top 25 States (Percent)

45. 45 Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*) *Latest avaiiable. Sources: NAIC Michigan was the least profitable state for auto insurers from 2001-2010 (Percent) Bottom 25 States

46. 46 *Latest available. Sources: NAIC. Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*) Hawaii was the most profitable state for home insurers from 2001-2010 due to the absence of hurricanes during this period (Percent) Top 25 States

47. 47 *Latest available. Sources: NAIC Hurricanes Katrina and Rita made Louisiana and Mississippi the least profitable states for home insurers from 2001-2010 Bottom 25 States (Percent) Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*)

48. Global Catastrophe Loss Developments and Trends 48 2011 Will Rewrite Catastrophe Loss and Insurance History But Will Losses Turn the Market?

49. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 49 Global Catastrophe Loss Summary: 2011 2011 Was the Highest Loss Year on Record for Economic Losses Globally  Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss $380 Billion in Economic Losses Globally (New Record)  New record, exceeding the previous record of $270B in 2005 $105 Billion in Insured Losses Globally  2011 losses were 2.5 times 2010 insured losses of $42B  Second only to 2005 on an inflation adjusted basis (new record on a unadjusted basis)  Over 5 times the 30-year average of $19B $72.8 Billion in Economic Losses in the US  Represents a 129% increase over the $11.8 billion amount through the first half of 2010 $35.9 Billion in Insured Losses in the US Arising from 171 CAT Events  Fifth highest year on record  Represents 51% increase over the $23.8 billion total in 2010 Source: Munich Re; Insurance Information Institute.

50. Geophysical events (earthquake, tsunami, volcanic activity) Meteorological events (storm) Hydrological events (flood, mass movement) Selection of significant loss events (see table) Natural catastrophes Earthquake, tsunami Japan, 11 March Earthquake New Zealand, 22 Feb. Cyclone Yasi Australia, 2–7 Feb. Landslides, flash floods Brazil, 12/16 Jan. Floods, flash floods Australia, Dec. 2010–Jan. 2011 Severe storms, tornadoes USA, 22–28 April Severe storms, tornadoes USA, 20–27 May Wildfires USA, April/Sept. Earthquake New Zealand, 13 June Floods USA, April–May Climatological events (extreme temperature, drought, wildfire) Number of Events: 820 Drought USA, Oct. 2010– ongoing Hurricane Irene USA, Caribbean 22 Aug.–2 Sept. Wildfires Canada, 14–22 May Drought Somalia Oct. 2010–Sept. 2011 Floods Pakistan Aug.–Sept. Floods Thailand Aug.–Nov. Earthquake Turkey 23 Oct. Flash floods, floods Italy, France, Spain 4–9 Nov. Floods, landslides Guatemala, El Salvador 11–19 Oct. Tropical Storm Washi Philippines, 16–18 Dec. Winter Storm Joachim France, Switzerland, Germany, 15–17 Dec. 50 Source: MR NatCatSERVICE Natural Loss Events, 2011 World Map

51. Natural Catastrophes Worldwide, 2011 © 2011 Munich Re 51 Overview and Comparison with Previous Years Source: MR NatCatSERVICE

52. 5 Costliest Natural Catastrophes Worldwide in Terms of Insured Losses, 2011 ($Mill) Source: MR NatCatSERVICE © 2011 Munich Re 52

53. Natural Catastrophes Worldwide 2011 Insured losses US$ 105bn - Percentage distribution per continent ContinentInsured losses US$ m America (North and South America) 40,000 Europe 2,000 Africa Minor damages Asia 45,000 Australia/Oceania18,000 37% 2% 44% 17% <1% 53 Source: MR NatCatSERVICE In 2011, 61% of insured natural catastrophe losses were in the Asia/Pacific region, nearly 3.5 times the average of 13% over the prior 30 years (1981-2010) In 2011, just 37% of insured natural catastrophe losses were in the Americas, barely half the average of 66% over the prior 30 years (1981-2010)

54. Natural Catastrophes Worldwide 1980 – 2011 Insured losses US$ 870bn - Percentage distribution per continent ContinentInsured losses US$ m America (North and South America) 566,000 Europe 146,000 Africa 2,000 Asia 115,000 Australia/Oceania 41,000 66% 16% <1% 13% 5% 54 Source: MR NatCatSERVICE In 2011, 61% of natural catastrophe losses were in the Asia/Pacific region, nearly 3.5 times the average of 13% over the prior 30 years (1981-2010)

55. Natural Catastrophes in Asia 1980 – 2011 Overall and insured losses in 2011 Dollars Overall losses (in 2011 values)Insured losses (in 2011 values) © 2011 Munich Re 55 Source: MR NatCatSERVICE ($ Billions) 2011 set a record for both overall economic losses in Asia ($266B) and insured losses ($45B). The rapid economic development of Asia and increased insurance penetration guarantee that losses will trend higher in the future.

56. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 56 Top 16 Most Costly World Insurance Losses, 1970-2011** (Insured Losses, 2011 Dollars, $ Billions) *Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only. **Figures do not include federally insured flood losses. Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research. Taken as a single event, the Spring 2011 tornado and thunderstorm season would likely become the 5 th costliest event in global insurance history 5 of the top 14 most expensive catastrophes in world history have occurred within the past 2 years

57. Worldwide Natural Disasters, 1980 – 2011 Number of Events Source: MR NatCatSERVICE 57 Meteorological events (Storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) Geophysical events (Earthquake, tsunami, volcanic eruption) There were 820 events in 2011

58. Worldwide Natural Disasters 1980–2011, Overall and Insured Losses 58 Overall losses (in 2011 values) Insured losses (in 2011 values) Source: MR NatCatSERVICE © 2011 Munich Re 2011 Overall Losses: $380 Bill Insured Losses: $105 Bill (Insured Losses, 2011 Dollars, $ Billions)

59. 59 U.S. Insured Catastrophe Loss Update 2011 Was One of the Most Expensive Years on Record

60. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 60 Top 14 Most Costly Disasters in U.S. History (Insured Losses, 2011 Dollars, $ Billions) *Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30. Sources: PCS; Insurance Information Institute inflation adjustments. Taken as a single event, the Spring 2011 tornado and storm season are is the 4 th costliest event in US insurance history Hurricane Irene became the 11 th most expense hurricane in US history

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 – 2011 Number of Events (Annual Totals 1980 – 2011) Source: MR NatCatSERVICE 61 37 8 51 2 There were 117 natural disaster events in 2011

62. Losses Due to Natural Disasters in the US, 1980–2011 (Overall & Insured Losses) 62 Overall losses (in 2011 values) Insured losses (in 2011 values) Source: MR NatCatSERVICE © 2011 Munich Re (2011 Dollars, $ Billions) 2011 Overall Losses: $72.8 Bill Insured Losses: $35.9 Bill 2011 was the 5 th most expensive year on record for insured catastrophe losses in the US. Approximately 50% of the overall cost of catastrophes in the US was covered by insurance in 2011 (Overall and Insured Losses)

63. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 63 US Insured Catastrophe Losses *PCS estimate through Sept. 30, 2011. 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; Insurance Information Institute. US CAT Losses Already Exceed Losses from All of 2010. Even Modest Hurricane Losses Will Make 2011 Among the Most Expensive Ever for CATs $100 Billion CAT Year is Coming Eventually Record Tornado Losses Caused 2011 CAT Losses to Surge ($ Billions) 2000s: A Decade of Disaster 2000s: $193B (up 117%) 1990s: $89B

64. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 64 US Insured Catastrophe Losses *PCS estimate through Sept. 30, 2011. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. US CAT Losses in 2011 Were the 5 th Highest in US History on An Inflation Adjusted Basis $100 Billion CAT Year is Coming Eventually Record Tornado Losses Caused 2011 CAT Losses to Surge ($ Billions, 2011 Dollars)

65. Natural Disaster Losses in the United States: 2011 65 Source: MR NatCatSERVICE

66. **Includes $700 million in flood losses insured through the National Flood Insurance Program. Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute. 2011’s Most Expensive Catastrophes, Insured Losses Includes $1.65B in AL, mostly in the Tuscaloosa and Birmingham areas Includes approximately $2B in losses for May 22 Joplin tornado

67. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 67 Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011* *Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data. 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. 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 2010s: 6.70* Combined Ratio Points

68. U.S. Thunderstorm Loss Trends, 1980 – 2011 68 Source: Property Claims Service, MR NatCatSERVICE Average thunderstorm losses are up more than 5 fold since the early 1980s Hurricanes get all the headlines, but thunderstorms are consistent producers of large scale loss. 2008-2011 are the most expensive years on record. Thunderstorm losses in 2011 totaled a record $25.8 billion

69. Source: Property Claims Service, MR NatCatSERVICE U.S. Winter Storm Loss Trends, 1980 – 2011 69 Insured winter storm losses in 2011 totaled $2.0 billion. Average winter storm losses have nearly doubled since the early 1980s

70. Source: National Forest Service, MR NatCatSERVICE U.S. Acreage Burned by Wildfires, 1980 – 2011 70 8.3 millions acres were burned by wildfires in 2011, one of the worst years on record, causing $855 in insured losses

71. Notable Wildfires in 2011  Worst wildfire year on record in Texas due to persistent drought.  Spring: Over 3 million acres burned in west Texas from 12 major seats of fire. Over 200 homes and businesses destroyed, $50 million insured loss.  September: Bastrop County Complex Fire near San Antonio destroys over 1,600 homes, insured loss of $530 million.  Worst wildfire year on record in Texas due to persistent drought.  Spring: Over 3 million acres burned in west Texas from 12 major seats of fire. Over 200 homes and businesses destroyed, $50 million insured loss.  September: Bastrop County Complex Fire near San Antonio destroys over 1,600 homes, insured loss of $530 million. Source: FEMA 71 © 2011 Munich Re

72. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 72 U.S. Insured Catastrophe Losses by Cause of Loss, 2011 ($ Millions). Source: ISO’s Property Claim Services Unit, Munich Re; Insurance Information Institute. Hurricanes & Tropical Storms, $5,510 Wildfires, $855 Thunderstorms (Incl. Tornadoes, $25,813 Winter Storms, $2,017 Geological Events, $50, (0.1%) Flood, $535, (1.5%) Other, $1,000 2011’s insured loss distribution was unusual with tornado and thunderstorm accounting for the vast majority of loss Thunderstorm/ Tornado losses were 2.5 times above the 30- year average

73. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 73 Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H1 1 1.Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars. 2.Excludes snow. 3.Does not include NFIP flood losses 4.Includes wildland fires 5.Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO’s Property Claim Services Unit. Hurricanes & Tropical Storms, $160.5 Fires (4), $9.0 Tornadoes (2), $119.5 Winter Storms, $30.0 Terrorism, $24.9 Geological Events, $18.5 Wind/Hail/Flood (3), $12.7 Other (5), $0.6 Wind losses are by far cause the most catastrophe losses, even if hurricanes/TS are excluded. Tornado share of CAT losses is rising

74. 74 2011: Nowhere to Run, Nowhere to Hide Most of the Country East of the Rockies Suffered Severe Weather in 2011, Impacting Most Insurers

75. Number of Federal Disaster Declarations, 1953-2011* *Through December 31, 2011. Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.http://www.fema.gov/news/disaster_totals_annual.fema The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011 The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s record 81 declarations. There have been 2,049 federal disaster declarations since 1953. The average number of declarations per year is 34 from 1953-2010, though that few haven’t been recorded since 1995.

76. 76 Federal Disasters Declarations by State, 1953 – 2011: Highest 25 States* *Through Dec. 31, 2011. 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

77. 77 Federal Disasters Declarations by State, 1953 – 2011: Lowest 25 States* *Through Dec. 31. Includes Puerto Rico and the District of Columbia. 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, Wyoming, Utah and Rhode Island had the fewest number of Federal Disaster Declarations

78. 78 SPRING 2011 TORNADO & SEVERE STORM OUTBREAK 2011 Losses Are Putting Pressure on US P/C Insurance and Reinsurance Markets

79. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 79 Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service. Number of Tornadoes and Related Deaths, 1990 – 2011 Tornadoes claimed more than 550 lives in 2011, the most since 1925 There were 1,884 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

80. U.S. Tornado Count, 2005-2011 80 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

81. 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# 81 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

82. Insurers Making a Difference in Impacted Communities Source: Insurance Information Institute 82 Destroyed home in Tuscaloosa. Insurers will pay some 165,000 claims totaling $2 billion in the Tuscaloosa/ Birmingham areas alone. Presentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm Recovery Fund

83. 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# 83 There were 9,417 “Large Hail” reports in 2011, causing extensive damage to homes, businesses and vehicles

84. 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# 84 There were 18,685 “Wind Damage” reports through Dec. 27, causing extensive damage to homes and, businesses

85. Severe Weather Reports, 2011 85 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

86. Tornadoes accounted for just 6% of all Severe Weather Reports but more than 550 deaths in 2011, the most in 75 years Number of Severe Weather Reports in US, by Type, 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#

87. 87 Underwriting Trends: Cycle, Catastrophes Are Among 2011 and 2012 Drivers

88. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 88 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

89. Underwriting Gain (Loss) 1975–2011* * Includes mortgage and financial guaranty insurers in all years Sources: A.M. Best, ISO; Insurance Information Institute. Large Underwriting Losses Are NOT Sustainable in Current Investment Environment Cumulative underwriting deficit from 1975 through 2010 is $455B ($ Billions) Underwriting losses in 2011 at $34.9 through Q3 will be largest since 2001

90. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 90 P/C Reserve Development, 1992–2011E Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in 2011 Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best. 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

91. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 91 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

92. 92 Performance by Segment: Personal Lines

93. Homeowners Insurance Combined Ratio: 1990–2012F Homeowners Line Could Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to Local Catastrophe Loss Activity Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P/12F).

94. Private Passenger Auto Combined Ratio: 1993–2012P Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P/12F).

95. 95 Cycle Drivers The Role of Losses and Reserves in the Underwriting Cycle

96. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 96 PP Auto Liability: Loss and LAE vs. Net Premiums Written, 1990-2010 Source: A.M. Best; Insurance Information Institute Historically, losses drive premium growth (which is primarily driven by rate) While Premium Growth Decelerated, the Driver Was Primarily Lower Losses, Allowing Auto Insurers to Maintain String Margins

97. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 97 PP Auto Liability: % Change in NPW vs. % Change in Loss & LAE, 1990 - 2010 Losses Drive Premiums Premiums Exhibit an Elastic Response (with a Lag) to Changes in Losses Sources: Insurance Information Institute calculations from A.M. Best data.. Average annual Net Written Premiums grew by 3.8% percent from 1990 – 2010 vs. 3.0% for Loss and LAE Premium growth decelerated but so did losses (even more quickly) allowing auto insurers to improve margins despite flat/falling rates

98. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 98 PP Auto Physical Damage: Change in NPW vs. Change in Loss & LAE, 1990 - 2010 Loss Trends Ultimately Drive Premium Trends Sources: Insurance Information Institute calculations from A.M. Best data. Average annual Net Written Premiums grew by 3.7% percent from 1990 – 2010 vs. 3.4.% for Loss and LAE Decelerating premium growth is driven by falling loss costs

99. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 99 P-C Loss Development vs. Change in NPW, 1983-2009 Source: A.M. Best; Insurance Information Institute Periods of reserve releases are associated with soft(er) market conditions Reserve Releases, in Addition to Losses, Drive Pricing Cycles Reserve releases bolster the bottom line and perpetuate soft market

100. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 100 P-C Industry Loss Development, 1983-2009 ($ Millions) Sources: A.M. Best, Insurance Information Institute ‘80s peak: $9.2B in 1986

101. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 101 Industry Loss Development as % of Net Earned Premium, 1983-2009 Sources: A.M. Best, Insurance Information Institute Prior year reserve releases in 2009 accounted for 4.6% of Net Earned Premium

102. 102 REINSURANCE MARKET CONDITIONS Record Global Catastrophes Activity is Pressuring Pricing

103. Source: Holborn; RAA. * 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further. Significant Market Losses, 1985-2011*

104. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 104 Reinsurer Share of Recent Significant Market Losses Source: Insurance Information Institute from reinsurance share percentages provided in RAA, ABIR and CEA press release, Jan. 13, 2011. Billions of 2011 Dollars 40% Reinsurance share of total insured loss Reinsurers Paid a High Proportion of Insured Losses Arising from Major Catastrophic Events Around the World in Recent Years $0.4 $4.0 $22.5 $9.5 $15.0 $3.5 $37.5 $13.0 $6.0 $10.0 $7.9 $8.3 $2.2 $2.8 $5.0 73% 60% 95% 44%

105. Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further. Significant Market Losses by Event, 1985-2011* Reinsurers are bearing a very high share of recent catastrophe losses Losses are putting pressure on property cat reinsurance prices in affected regions. The impact for US property catastrophe pricing is uncertain.

106. Global Reinsurance Capital, 2007-2011:H1 Reinsurer Capital% Change Source: Aon Reinsurance Market Outlook, September 2011 from Individual Company and AonBenfield Analytics; Insurance Information Institute. High Global Catastrophe Losses Have Had a Modest Adverse Impact on Global Reinsurance Market Capacity Global reinsurance market capacity is down in mid-2011 due to large catastrophe losses

107. Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011. Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—2Q11 Most excess reinsurance capacity was removed from the market in 2011, leaving uncertainty as to the direction of 2012 reinsurance renewals

108. Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011. Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11) A modest increase in global property catastrophe reinsurance pricing was evident in June 1 renewals in the wake of record global catastrophe losses. Larger increase could occur for the Jan.1, 2012 renewals

109. 109 Claim Trends in Auto Insurance Rising Costs Held in Check by Falling Frequency: Can That Pattern Be Sustained?

110. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 110 Bodily Injury: Severity Trend Rising, Frequency Decline Has Ended *For 2011, data are for the 4 quarters ending with 2011:Q3. Source: ISO/PCI Fast Track data; Insurance Information Institute Annual Change, 2005 through 2011* Cost Pressures Will Increase if BI Severity Frequency Increases Continue

111. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 111 Property Damage Liability: Severity is Up, Frequency Nearly Flat Since 2009 Annual Change, 2005 through 2011* Severity/Frequency Trends Were Stable Through 2010, But Rising Severity in 2011 Is a Concern *For 2011, data are for the 4 quarters ending with 2011:Q3. Source: ISO/PCI Fast Track data; Insurance Information Institute

112. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 112 No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse* *No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2011:Q3. Source: ISO/PCI Fast Track data; Insurance Information Institute Annual Change, 2005 through 2011* Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ

113. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 113 Collision Coverage: Frequency and Severity Trends Are Up in 2011* Annual Change, 2005 through 2011* The Recession, High Fuel Prices Have Helped Temper Frequency and Severity, But this Trend Will Likely Be Reversed Based on Evidence from Past Recoveries *For 2011, data are for the 4 quarters ending with 2011:Q3. Source: ISO/PCI Fast Track data; Insurance Information Institute

114. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 114 Comprehensive Coverage: Frequency and Severity Trend in 2011 is Unfavorable Annual Change, 2005 through 2011* Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper Severity, But This Factors Will Weaken as Economy Recovers *For 2011, data are for the 4 quarters ending with 2011:Q3. Source: ISO/PCI Fast Track data; Insurance Information Institute Severe weather is a principal cause of the spike in both frequency and severity in 2011

115. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 115 Average No-Fault Claim Severity, 2011:Q3* Several States Including NY Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply. *Average of the four quarters ending 2011:Q3. Source: ISO/PCI Fast Track data; Insurance Information Institute. MI, NJ, NY and FL currently are the largest states that have the most severe problems in their no-fault system NY has the 4 th highest auto no-fault average claim cost (severity) in the US

116. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 116 Increase in No-Fault Claim Severity: Selected States, 2004-2011* *2011 figures are for the 4 quarters ending 2011:Q3. Sources: Insurance Information Institute research from ISO/PCI Fast Track data. The no-fault systems in MI, NJ, NY, FL, and MN are under stress due to rising fraud and abuse, which leads to higher premiums for honest drivers. +48.6% +45.6% +36.6% +36.5% +38.4%

117. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 117 Florida’s No-Fault Fraud Tax: Estimated Aggregate Annual Cost, 2009-2011E ($ Millions) *2011 estimate is based on data through Q2:2011. Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data. Unscrupulous Medical Providers and Attorneys Are Costing Honest Florida Drivers Hundreds of Millions of Dollars The total fraud tax levied on Florida vehicle owners is an estimated $658 million in 2011. +107.6% +6.5%

118. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 118 New York State No-Fault Claim Frequency and Severity, 1997–2011:Q3 About 10% of No-Fault Claim Costs in 2011 Were Estimated to Be Attributable to Fraud and Abuse No-Fault Claim Severity Claim Severity nearly reached a record high in 2010:Q2: $8,990 Avg. Claim Severity Rose 63% in 5 years after 1997 Presbyterian Decision Avg. Claim Severity is up 44% since 2004:Q4 though 2011:Q3 Claim Frequency was up 27% in 2011:Q1 from 2008:Q3 *2011 figure is based on data for the 4 quarters ending Q3:2011. Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.

119. New York’s No-Fault Fraud Problem, Paid Claims Severity** *Middle month of quarter **For the four quarters ending in quarter indicated Sources: Insurance Information Institute calculations based on ISO/PCI Fast Track Data and BLS Medical Care CPI Medical Care Cost Index Average NY PIP Claim Severity, Indexed to 2004:Q4=100 Fraud Gap? NY PIP Severity Index No-fault fraud and abuse has resulted in claim severity increases far in excess of the general increase in the cost of medical care

120. 120 Distribution Trends Distribution by Channel Type Continues to Evolve

121. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 121 All P/C Lines Distribution Channels, Direct vs. Independent Agents Source: Insurance Information Institute; based on data from Conning and A.M. Best. Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained or held generally steady in recent years. Direct channels include exclusive agency companies, direct marketers and direct sales (e.g., internet)

122. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 122 Personal Lines Distribution Channels, Direct vs. Independent Agents Source: Insurance Information Institute; based on data from Conning and A.M. Best. Independent agents have lost significant personal lines market share since the early 1970s. Although the trend has slowed, it may be accelerating again.

123. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 123 Commercial P/C Distribution Channels, Direct vs. Independent Agents Source: Insurance Information Institute; based on data from Conning and A.M. Best. Independent agents have seen only modest erosion in commercial lines market share in recent decades

124. 124 P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 by High Catastrophe Loss & Other Factors

125. 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

126. A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE * 2008 -2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011:Q3 combined ratio including M&FG insurers is 109.9, ROAS = 1.9%. 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 ~5.5% ROE in 2009/10, 10% in 2005 and 16% in 1979

127. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011* *Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS through Q3 data. Note: Data for 2008-2011 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 2011: 3.0%* History suggests next ROE peak will be in 2016-2017 ROE 1975: 2.4%

128. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 128 ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2011:Q3* * Excludes Mortgage & Financial Guarantee in 2008 - 2011. Sources: ISO, Fortune; Insurance Information Institute. P/C Profitability Is Both by Cyclicality and Ordinary Volatility Hugo Andrew Northridge Lowest CAT Losses in 15 Years Sept. 11 Katrina, Rita, Wilma 4 Hurricanes Financial Crisis* (Percent)

129. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 129 ROE vs. Equity Cost of Capital: U.S. P/C Insurance:1991-2011* * Return on average surplus in 2008-2011 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 Every Year Since 2008 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 -8.9 pts

130. P/C Insurance Industry ROE vs. Fortune 500, 1975 – 2011* For 2011:H1 ROAS. Source: Insurance Information Institute; NAIC, ISO. ROE

131. P/C Premium Growth Cycles 131 Cyclicality is Driven Primarily by the Industry’s Underwriting Cycle, Not the Economy

132. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 132 Soft Market Persisted in 2010 but Growth Returned: More in 2011? (Percent) 1975-781984-872000-03 *2011 figure is through first 9 months vs. same period in 2010 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 0.9% in 2010 2011:Q3 growth was +3.1%

133. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 133 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) Through 2011:Q3, growth in personal lines predominating cos. (+3.1%) and commercial lines predominating cos. (+3.9%), diversified (+2.3%)

134. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 134 Monthly Change* in Auto Insurance Prices, 1991–2011* *Percentage change from same month in prior year; through October 2011; seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. Cyclical peaks in PP Auto tend to occur approximately every 10 years (early 1990s, early 2000s and likely the early 2010s) “Hard” markets tend to occur during recessionary periods Pricing peak occurred in 2010

135. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 135 Average Commercial Rate Change, All Lines, (1Q:2004–4Q:2011) Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute KRW Effect Pricing as of Q3:2011 was positive for the first time since 2003. Slightly stronger gains in Q4. (Percent) Q2 2011 marked the 30 th consecutive quarter of price declines

136. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 136 Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q3 Source: Council of Insurance Agents and Brokers; Insurance Information Institute. Percentage Change (%) Peak = 2001:Q4 +28.5% Pricing Turned Negative in Early 2004 and Has Been Negative Ever Since Pricing turned positive (+0.9%) in Q3:2011, the first increase in nearly 7 years (Q4:2003) KRW Effect: No Lasting Impact Trough = 2007:Q3 -13.6%

137. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 137 Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q3 Source: Council of Insurance Agents and Brokers; Insurance Information Institute. Downward pricing pressure still evident for large accounts, down 0.6% in Q3:2011 Despite Q3:2011 gain of 0.9%, pricing today is where is was in late 2000 (pre-9/11) 1999:Q4 = 100

138. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 138 Change in Commercial Rate Renewals, by Line: 2011:Q4 Source: Council of Insurance Agents and Brokers; Insurance Information Institute. Major Commercial Lines Renewed Uniformly Upward in Q4:2011 for Only the Second Time Since 2003; Property Lines & Workers Comp Leading the Way Percentage Change (%) Property lines are showing larger increases than casualty lines, with the exception of workers compensation

139. Workers Comp Rate Changes, 2008:Q4 – 2011:Q4 Source: Council of Insurance Agents and Brokers; Information Institute. The Q4 2011 WC rate change was the largest among all major commercial lines (Percent Change)

140. *Insurance Information Institute estimates for 2011. Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information Institute Cost of Risk vs. Commercial Lines Combined Ratio The cost of risk cannot continue to fall as actual results deteriorate

141. How the Risk Dollar is Spent (2011) Source: 2011 RIMS Benchmark Survey, Advisen; Insurance Information Institute Firms w/Revenues < $1 Billion Firms w/Revenues > $1 Billion Management & Professional Liability Costs Account for 9% - 13% of the Risk Dollar

142. 142 Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010 Sources: SNL Financial LC.; Insurance Information Institute. Top 25 States North Dakota is the growth juggernaut of the P/C insurance industry—too bad nobody lives there…

143. 143 Sources: SNL Financial LC; Insurance Information Institute. Bottom 25 States States with the poorest performing economies also produced the most negative net change in premiums of the past 5 years Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010 US Direct Premiums Written declined by 1.6% between 2005 and 2010

144. Capital/Policyholder Surplus (US) 144 Have Large Global Losses Reduced Capacity in the Industry, Setting the Stage for a Market Turn?

145. US Policyholder Surplus: 1975–2011* * As of 9/30/11. 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 $0.83:$1 as of 9/30/11, A Near Record Low (at Least in Recent History)* Surplus as of 9/30/11 was $538.6 down 4.6% from the record $564.7B as of 3/31/11, but still up 23.2% ($101.5B) from the crisis trough of $437.1B at 3/31/09. Prior peak was $521.8 as of 9/30/07. Surplus as of 9/30/11 was 3.2% above 2007 peak.

146. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 146 Policyholder Surplus, 2006:Q4–2011:Q3 Sources: 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. *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 $0.83 of NPW, close to the strongest claims- paying status in its history.

147. Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1 Excess/(Deficit) Capital (Policyholder Surplus) Record Policyholder Surplus (Capital) Resulted in Significant Excess Capital in the P/C Insurance Sector in 2010. Deteriorating Underwriting Losses, Higher CAT Activity, More Modest Market Returns Shrank Excess Capital in 2011 by Nearly Half. Annual Change in Policyholder Surplus 2000-2002: Tech bubble bursts, 9/11, high underwriting losses erode capital base 2005: Katrina, Rita, Wilma produce record CAT losses 2006/07: Low CAT losses, strong underwriting results since 1940s increase capital 2008: Financial crisis causes sharp drop in capital 2009-10: End of financial crisis, rising asset prices. modest u/w losses push capital to record levels Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1. Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written High cats, u/w losses push capital down

148. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 148 Paid-in Capital, 2005–2011:Q3 Source: ISO; Insurance Information Institute. ($ Billions) Paid-in capital for insurance operations rose by $27.4B in 2010, the largest on record dating back to 1959 In 2010 One Insurer’s Paid-in Capital Rose by $22.5B as Part of an Investment in a Non-insurance Business $27.4 Virtually no new capital entered the industry in 2011

149. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 149 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)

150. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 150 * 2011 NWP and Surplus figures are % changes as of Q3:11 vs. Q3:10. Sources: A.M. Best, ISO, Insurance Information Institute Historically, Hard Markets Follow When Surplus “Growth” is Negative* (Percent) Sharp Decline in Capacity is a Necessary but Not Sufficient Condition for a True Hard Market Surplus growth was positive until Q1:2011 but is now down slightly 2008 surplus plunge did not lead to a hard market

151. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 151 The Premium-to-Surplus Ratio in 2011:Q3 Implies that P/C Insurers Held $1 in Surplus Against Each $0.83 Written in Premiums. In 1974, Each $1 of Surplus Backed $2.70 in Premium. *2011 data are as of 9/30/11. Sources: Insurance Information Institute calculations from A.M. Best data. Ratio of Net Premiums Written to Policyholder Surplus, 1970-2011* The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.76:1 in 2010. It has decreased as PHS grows more quickly than NPW, with the effect of holding down profitability. Record High P-S Ratio was 2.7:1 in 1974 Record Low P-S Ratio was 0.76:1 as of 12/31/10, rising slightly to 0.83:1 as of 9/30/11

152. Merger & Acquisition 152 Capital Cycles Can Drive Consolidation

153. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 153 *2011 data are through December 1. Source: SNL Securities; Insurance Information Institute. M&A Activity in the US P/C Insurance Industry, 1997-2011* P/C M&A activity in 2011 is up 60% since 2008, its highest level (in $ terms) since 2008 M&A Activity in the P/C Insurance Industry Remains Well Below its 1990s Peak

154. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 154 M&A Activity Globally Among P/C Insurers Remains Subdued: Little Capacity Leaving Sources: Conning Research; Insurance Information Institute. $ Billions

155. INVESTMENTS: THE NEW REALITY 155 Investment Performance is a Key Driver of Profitability

156. Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q3 1 Investment Gains through Q3:2011 Were Surprisingly Robust. Investment Gains Recovered Significantly in 2010 Due to Realized Investment 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 through Q3:2011 were $2.1B above the same period in 2010—a surprise given falling rates and flat stock markets

157. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 157 P/C Insurer Net Realized Capital Gains/Losses, 1990-2011:3Q Sources: A.M. Best, ISO, Insurance Information Institute. Insurers Are Posting 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

158. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 158 U.S. 10-Year Treasury Note Yields: A Long Downward Trend, 1990–2011* *Monthly, through November 2011 Note: Recessions indicated by gray shaded columns. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txt National Bureau of Economic Research (recession dates); Insurance Information Institutes.http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txt Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for nearly a decade. Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come. Yields on 10-Year U.S. Treasury Notes have been essentially below 4% since January 2008.

159. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 159 Daily Yields, 10-Year U.S. T-Notes vs. Moody’s Seasoned AAAs, 2010-2011* *through 11/30/2011 Sources: Federal Reserve Board at http://www.federalreserve.gov/releases/h15/data/Business_day/H15_TCMNOM_Y10.txt and http://www.federalreserve.gov/releases/h15/data/Business_day/H15_AAA_NA.txthttp://www.federalreserve.gov/releases/h15/data/Business_day/H15_TCMNOM_Y10.txthttp://www.federalreserve.gov/releases/h15/data/Business_day/H15_AAA_NA.txt The spread between the two yields reflects confidence (or lack of it) in the economy’s prospects. A wider spread indicates worry; narrower = confidence. We saw a slump like this in March - August 2010

160. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 160 Treasury Yield Curves: Pre-Crisis (July 2007) vs. Dec. 2011 Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2014. The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through 2013 and Possibly into 2014 Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

161. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 161 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*

162. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 162 Distribution of P/C Insurance Industry’s Investment Portfolio Sources: SNL Financial; Insurance Information Institute research. Invested assets totaled $1.316 trillion as of 12/31/10 Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of 12/31/10 Only about 16% of assets were invested in common stock as of 12/31/10 The portfolio is very conservative and returns are impacted by low interest rates. Portfolio Facts Bonds Common Stock Real Estate As of December 31, 2010 Cash and Short-term Investments Preferred Stock Other

163. Financial Strength & Underwriting 163 Cyclical Pattern is P-C Impairment History is Directly Tied to Underwriting, Reserving & Pricing

164. 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 insurers in Missouri did encounter problems in 2011 following the May tornado in Joplin. They were absorbed by a larger insurer and all claims were paid.

165. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 165 P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2010 Source: A.M. Best; Insurance Information Institute 2010 impairment rate was 0.35%, down from 0.65% in 2009 and near the record low of 0.17% in 2007; Rate is still less than one-half the 0.81% average since 1969 Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007

166. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 166 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

167. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 167 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

168. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 168 Number of Recessions Endured by P/C Insurers, by Number of Years in Operation Sources: Insurance Information Institute research from National Bureau of Economic Research data. Number of Recessions Since 1860 Many US Insurers Are Close to a Century Old or Older Number of Years in Operation Insurers are true survivors—not just of natural catastrophes but also economic ones

169. 169 The Economic Storm What the Financial Crisis and Recession Mean for the Industry’s Exposure Base, Growth and Profitability

170. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 170 US Real GDP Growth* *Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 1/12; 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% 2011 got off to a sluggish start, but growth is expected to proceed at a modest pace in 2012-2013

171. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 171 Real GDP Growth vs. Real P/C Premium Growth: Modest Association Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 11/11; 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 (%)

172. 172 Labor Market Trends Massive Job Losses Sapped the Economy and Personal/Commercial Lines Exposure, But Trend is Improving

173. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 173 Unemployment and Underemployment Rates: Stubbornly High in 2011, But Falling Unemployment stood at 8.5% in December Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983. Peak rate in the last 30 years: 10.8% in November - December 1982 Source: US Bureau of Labor Statistics; Insurance Information Institute. U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 15.2% in Dec. 2011 January 2000 through December 2011, Seasonally Adjusted (%) Recession ended in November 2001 Unemployment kept rising for 19 more months Recession began in December 2007 Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market might finally be improving Dec 11

174. Monthly Change in Private Employment January 2008 through December 2011* (Thousands) Private Employers Added 3.343 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institutehttp://www.bls.gov/ces/home.htm Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period 212,000 private sector jobs were created in December

175. Cumulative Private Sector Job Losses December 2007 through December 2011* (Thousands) Private Employers Added 3.343 Million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008. It Is Unlikely that Private Sector Employment Will Fully Recoup All Jobs Lost Until Well into 2014. Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institutehttp://www.bls.gov/ces/home.htm Cumulative job losses peaked at 8.444 million in December 2009 Even with 3.343 million new jobs created from Jan. 2010 through Dec. 2011, there are still 5.1 million fewer private sector jobs than before the Great Recession began in Dec. 2007

176. 176 Unemployment Rates by State, November 2011: Highest 25 States* *Provisional figures for November 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. In November, 43 states and the District of Columbia reported over-the-month unemployment rate decreases, 3 had increases, and 4 had no change.

177. 177 Unemployment Rates By State, November 2011: Lowest 25 States* *Provisional figures for November 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. In November, 43 states and the District of Columbia reported over-the-month unemployment rate decreases, 3 had increases, and 4 had no change.

178. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 178 US Unemployment Rate Rising unemployment eroded payrolls and workers comp’s exposure base. Unemployment peaked at 10% in late 2009. * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/12); Insurance Information Institute 2007:Q1 to 2013:Q4F* Unemployment forecasts remain stubbornly high through 2012, but still imply millions of new jobs will created. Jobless figures have been revised downwards for 2012

179. Inflation 179 Is it a Threat to Claim Cost Severities?

180. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 180 Annual Inflation Rates, (CPI-U, %), 1990–2017F Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 1/12 (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.

181. Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years *Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics) A claim that cost $1,000 in 1961 would cost nearly $16,000 based on medical cost inflation trends over the past 50 years.

182. P/C Personal Insurance Claim Cost Drivers Grow Faster Than the Core CPI Suggests Sources: Bureau of Labor Statistics; Insurance Information Institute. Price Level Change, 2011 vs. 2010 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 182 Excludes Food and Energy

183. P/C Commercial Property Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests Sources: Bureau of Labor Statistics; Insurance Information Institute. Price Level Change, 2011 vs. 2010 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. 183 Excludes Food and Energy

184. Regulatory Environment & Financial Services Reform 184 State Regulatory Environments Vary Tremendously and Can Impact Insurer Profitability and Ability to Compete

185. Source: James Madison Institute, February 2008. ME NH MA CT PA WV VA NC LA TX OK NE ND MN MI IL IA ID WA OR AZ HI NJ RI B DE AL VT NY MD SC GA TN AL FL MS AR NM KY MO KS SD WI IN OH MT CA NV UT WY CO AK = A = B = C = D = F = NG Source: Heartland Institute, May 2011 B B+ D B C- B- B+ C- B+ C- B C+ C- B- D- B F D C- C+ B+ A+ C- B A A B C+ B- C+ C F D+ F B C+ F F D- 2010 Property and Casualty Insurance Regulatory Report Card Not Graded: District of Columbia Pennsylvania’s regulatory environment got a grade of “C” in 2010

186. www.iii.org Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig Insurance Information Institute Online: