2012 HALF-YEAR NATURAL CATASTROPHE REVIEW July 13, 2012

2012 HALF-YEAR NATURAL CATASTROPHE REVIEW

July 13, 2012

Questions and AnswersQuestions and Answers

Welcome/IntroductionTerese Rosenthal

Welcome/IntroductionTerese Rosenthal

US Natural Catastrophe UpdateCarl Hedde

US Natural Catastrophe UpdateCarl Hedde

Global Natural Catastrophe UpdateErnst Rauch

Global Natural Catastrophe UpdateErnst Rauch

Economic Implications of Natural Catastrophe LossesDr. Robert Hartwig

Economic Implications of Natural Catastrophe LossesDr. Robert Hartwig

Agenda

2

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Questions and AnswersQuestions and Answers

Live TweetingLive Tweeting

#NATCAT2012#NATCAT2012

US NATURAL CATASTROPHE UPDATE

Carl Hedde, SVP, Head of Risk AccumulationMunich Reinsurance America, Inc.

Source: FEMASource: FEMA

From 1980 until today all loss events; for USA and selected countries in Europe all loss events since 1970.

Retrospectively, all great disasters since 1950.

In addition, all major historical events starting from 79 AD – eruption of Mt. Vesuvio (3,000 historical data sets).

Currently more than 31,000 events

From 1980 until today all loss events; for USA and selected countries in Europe all loss events since 1970.

Retrospectively, all great disasters since 1950.

In addition, all major historical events starting from 79 AD – eruption of Mt. Vesuvio (3,000 historical data sets).

Currently more than 31,000 events

5

The Loss Database TodayThe Loss Database Today

MR NatCatSERVICEOne of the world‘s largest databases on natural catastrophes

© 2012 Munich Re

Thunderstorm (tornado-hail) activity accounts for the almost all US losses so far, and are estimated at US$ 8.8bn, the third most costly spring thunderstorm season in US history. Thunderstorm (tornado-hail) activity accounts for the almost all US losses so far, and are estimated at US$ 8.8bn, the third most costly spring thunderstorm season in US history.

US Natural Catastrophes 2012 Headlines

US Natural Catastrophe Update

6© 2012 Munich Re

Severe droughts now impacting central and southwest parts of country; Two major wildfires in Colorado in June caused record damage in the state from the peril, and the largest wildfire in New Mexico history occurred in May.

Severe droughts now impacting central and southwest parts of country; Two major wildfires in Colorado in June caused record damage in the state from the peril, and the largest wildfire in New Mexico history occurred in May.

No significant, damaging earthquakes in US during first half of 2012.No significant, damaging earthquakes in US during first half of 2012.

Very mild winter over most of US causes only minor winter storm losses. Lack of heavy winter precipitation limited spring flooding but has exacerbated drought conditions. Very mild winter over most of US causes only minor winter storm losses. Lack of heavy winter precipitation limited spring flooding but has exacerbated drought conditions.

Active early hurricane season; tropical storms Beryl and Debby caused minor wind damage and extensive flooding in Florida. Active early hurricane season; tropical storms Beryl and Debby caused minor wind damage and extensive flooding in Florida.

Insured losses in the United States during the first six months of 2012 totaled US$ 9.3bn – near the long-term average but well below the US$ 24.4bn seen in the first half of 2011 (in 2012 Dollars).

Insured losses in the United States during the first six months of 2012 totaled US$ 9.3bn – near the long-term average but well below the US$ 24.4bn seen in the first half of 2011 (in 2012 Dollars).

Natural Disaster Losses in the United States, 2012

7© 2012 Munich ReSource: MR NatCatSERVICE


Natural Disasters in the United States, 1980 – 2012 Number of Events, January – June only

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami, volcanic eruption)

© 2012 Munich ReSource: MR NatCatSERVICE

1

61

6

22

20

40

60

80

100

120

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

First Six Months 2012 90 Events

8


Natural Disasters in the United States, 1980 – 2012 Number of Events (Annual Totals 1980 – 2011 vs. First Six Months 2012)





© 2012 Munich ReSource: MR NatCatSERVICE

1

61

6

22

50

100

150

200

250

300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

First Six Months 2012 90 Events

9


50

100

150

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Losses Due to Natural Catastrophes in the United States1980 – 2012 (Annual Totals 1980 – 2011 vs. First Six Months 2012)

Sources: MR NatCatSERVICE, Property Claims Services

Overall losses (in 2011 values) Insured losses (in 2011 values)

© 2012 Munich Re 10

Insured losses in the US totaled US$ 9.3bn.Insured losses in the US totaled US$ 9.3bn.


2012 US THUNDERSTORM SEASON

Source: NOAA/NWSSource: NOAA/NWS

2012 US Tornado Count

12© 2012 Munich ReSource: NOAA


US Thunderstorm Loss TrendsJanuary – June Only, 1980 - 2012

Thunderstorm losses for the period January – June in 2012 much lower than 2011, but is still the third worst spring thunderstorm season loss in history.Thunderstorm losses for the period January – June in 2012 much lower than 2011, but is still the third worst spring thunderstorm season loss in history.

Sources: Property Claims Service, MR NatCatSERVICE 13© 2012 Munich Re

First Six Months 2012

$8.8 bn


US Thunderstorm Loss TrendsAnnual Totals 1980 – 2011 vs. First Six Months 2012

Average thunderstorm losses have increased over fivefold since 1980. It is likely that 2012 will be one of the top 5 worst thunderstorm losses of all time.Average thunderstorm losses have increased over fivefold since 1980. It is likely that 2012 will be one of the top 5 worst thunderstorm losses of all time.

14© 2012 Munich ReSources: Property Claims Service, MR NatCatSERVICE

First Six Months 2012

$8.8 bn


Source: Property Claims ServiceMR NatCatSERVICE

Notable Thunderstorm EventsFirst Six Months 2012

15© 2012 Munich Re

Source: FEMA

Large hail event in St. Louis

metropolitan region. Hailstones up

to 2.75” in diameter. Over 200,000

claims for damage, US$ 1.0bn loss.

Large hail event in St. Louis

metropolitan region. Hailstones up

to 2.75” in diameter. Over 200,000

claims for damage, US$ 1.0bn loss.

Over 170 tornadoes over Ohio and

Tennessee River valley regions.

Some small towns almost

completely destroyed. About

180,000 buildings damaged or

destroyed, US$ 2.4bn insured loss.

Over 170 tornadoes over Ohio and

Tennessee River valley regions.

Some small towns almost

completely destroyed. About

180,000 buildings damaged or

destroyed, US$ 2.4bn insured loss.

March 2-3March 2-3

April 28-29April 28-29


OTHER US NATURAL CATASTROPHES IN 2012

Source: FEMASource: FEMASource: NASASource: NASA

Current US Drought Conditions

17© 2012 Munich ReSource: National Drought Mitigation Center


Number of Acres Burned in Wildfires, 1980 – 2012

Source: National Interagency Fire Center © 2012 Munich Re 18

First Six Months 2012 1.7 million acres


Notable Wildfires in 2012

Source: FEMA

19© 2012 Munich Re

Source: USFS

“Whitewater-Baldy” fire scorched over 278,000 acres over May and June, becoming the largest wildfire in state history, but with minimal insurance impacts.

“Whitewater-Baldy” fire scorched over 278,000 acres over May and June, becoming the largest wildfire in state history, but with minimal insurance impacts.

“High Park” fire near Fort Collins

destroyed 257 homes and “Waldo

Canyon” fire near Colorado Springs

destroyed over 300 homes, becoming

the most damaging fire in state

history. Insured losses from both fires

are estimated at US$ 500m.

“High Park” fire near Fort Collins

destroyed 257 homes and “Waldo

Canyon” fire near Colorado Springs

destroyed over 300 homes, becoming

the most damaging fire in state

history. Insured losses from both fires

are estimated at US$ 500m.

ColoradoColorado

New MexicoNew Mexico


Tropical Cyclones Impacting the United StatesFirst Six Months 2012

Source: NOAA 20© 2012 Munich Re

Beryl

2012 was the first time

since 1908 that two

named storms occurred

in May (Alberto & Beryl)

Debby is the earliest 4th

named storm in the

Atlantic Historical

Record.

2012 was the first time

since 1908 that two

named storms occurred

in May (Alberto & Beryl)

Debby is the earliest 4th

named storm in the

Atlantic Historical

Record.

Debby

Tropical Cyclones Tropical Cyclones


US Tropical Cyclones in 2012First Six Months 2012

Landfall on May 28 near Jacksonville, Florida as a tropical storm with sustained winds of 70mph; strongest May tropical storm ever to make US landfall.

Minor wind damage and flooding in Florida and Georgia.

Landfall on May 28 near Jacksonville, Florida as a tropical storm with sustained winds of 70mph; strongest May tropical storm ever to make US landfall.

Minor wind damage and flooding in Florida and Georgia.

Photo: FEMA

21© 2012 Munich Re

Tropical Storm BerylTropical Storm Beryl

Landfall on June 26 near Steinhatchee, Florida as a tropical storm with sustained winds of 40mph.

Torrential rains of up to 25” caused extensive flooding in the Florida Panhandle, with lesser flooding elsewhere in the state.

Landfall on June 26 near Steinhatchee, Florida as a tropical storm with sustained winds of 40mph.

Torrential rains of up to 25” caused extensive flooding in the Florida Panhandle, with lesser flooding elsewhere in the state.

Tropical Storm DebbyTropical Storm Debby

Sou

rce:

NA

SA


There has not been a major hurricane landfall in the US since Wilma in 2005.There has not been a major hurricane landfall in the US since Wilma in 2005.

Number of US Landfalling Tropical Cyclones, 1900 - 2012

Source: NOAA 22© 2012 Munich Re


There has not been a major hurricane landfall in the US since Wilma in 2005.There has not been a major hurricane landfall in the US since Wilma in 2005.

Insured US Tropical Cyclone Losses, 1980 - 2012

Sources: Property Claims Service, MR NatCatSERVICE, NFIP 23© 2012 Munich Re

First Six Months 2012 Total

US$ 50 million


GLOBAL NATURAL CATASTROPHE UPDATE

Ernst RauchHead of Corporate Climate CenterMunich Re

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Selection of significant loss events (see table)

Natural catastrophes

Climatological events(extreme temperature, drought, wildfire)

Number of events: 450Number of events: 450

Severe storms, tornadoesUSA, 2–4 MarchFatalities: 41

Severe stormsUSA, 28–29 April

EarthquakeMexico, 20 March

Cyclone FunsoMozambique, 19–28 JanuaryFatalities: 46

Floods, flash floodsAustralia, Feb–March

Floods, landslidesChina, May–JuneFatalities: 127

Winter damage/avalanchesAfghanistan, Jan–MarchFatalities: 160

Cold waveEastern Europe, Jan–FebFatalities: 745

EarthquakeItaly, 20/29 MayFatalities: 18

Winter Storm AndreaEurope, 5–6 January

© 2012 Munich ReSource: MR NatCatSERVICE 25

Global Natural Catastrophe Update

Natural Catastrophes January – June 2012World map

Natural Catastrophes Worldwide 2012Overview and Comparison with Previous Years



Source: MR NatCatSERVICE





















Natural Catastrophes Worldwide 1980 – 2012Number of Events (Annual Totals 1980 – 2011 vs. First Six Months 2012)

Number

Source: MR NatCatSERVICE © 2012 Munich Re 31

200

400

600

800

1 000

1 200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

First Six Months in 2012 450 Events


Natural Catastrophes Worldwide 1980 – 2012Overall and Insured Losses (Annual Totals 1980 – 2011 vs. First Six Months 2012)

(bn US$)

Overall losses (in 2011 values) Insured losses (in 2011 values)

Overall losses totaled US$ 26bn; Insured losses totaled US$ 12bnOverall losses totaled US$ 26bn; Insured losses totaled US$ 12bn

© 2012 Munich Re 32Source: MR NatCatSERVICE

50

100

150

200

250

300

350

400

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


Natural Catastrophes: Comparison of Insured Losses Percentage Distribution - Annual Totals 1980 – 2011 vs. First Six Months 2012

<1%<1%

65%

5%

13%17%

2%

85%

10%2%

© 2012 Munich ReSource: MR NatCatSERVICE 33


Natural Catastrophes Worldwide 2012The Five Costliest Natural Catastrophes for the Insurance Industry

Source: PCS - Property Claim Services © 2012 Munich Re 34


Costliest Natural Catastrophes Since 1950Rank by Insured Losses

35© 2012 Munich ReSource: MR NatCatSERVICE


National Climate Data Center of NOAAState of the Climate Global Analysis May 2012

Source: NOAA © 2012 Munich Re 36


National Climate Data Center of NOAAState of the Climate Global Analysis May 2012

Spain experienced its fourth warmest May since national records began in 1960, with a nationally-averaged temperature that was 2.7°C (4.9°F) above average. Eleven stationsacross different regions of Spain observed their highest May temperatures on records.

Source: Reuters

Source: Agencia Estatal de Meteorologá © 2012 Munich Re

(Periodo de Referencia: 1971-2000)

37


Natural Catastrophes Worldwide 2012

SummarySummary

The first half year is below the average in terms of fatalities, overall and insured losses. The first half year is below the average in terms of fatalities, overall and insured losses.

Significant natural catastrophes occurred mainly in the US, with insured losses up to US$ 9.3bn.Significant natural catastrophes occurred mainly in the US, with insured losses up to US$ 9.3bn.

Especially wild fires are burning in the US and Spain. Especially wild fires are burning in the US and Spain.

91% of all registered disasters are weather-related events. 91% of all registered disasters are weather-related events.

The Northern Hemisphere land and ocean surface temperature for May 2012 was the all time warmest May on record, starting in 1880. The Northern Hemisphere land and ocean surface temperature for May 2012 was the all time warmest May on record, starting in 1880.

© 2012 Munich Re 38Source: MR NatCatSERVICE

No significant earthquakes occurred in the first six months on the global scale. No significant earthquakes occurred in the first six months on the global scale.


Market and Financial Impact Catastrophe Losses

First Half 2012Insurance Information Institute

July 13, 2012

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

40

2012: Severe Weather Activity Is Running Well Below 2011

Economic and Insured Losses Remain High

41

1,1

33

1,1

32 1

,29

7

1,1

73

1,0

82 1,2

34

1,1

73

1,1

48

1,4

24

1,3

45

1,0

71 1,2

16

94

1

1,3

76

1,2

64

1,1

03

1,0

98

1,6

92

1,1

46 1,2

82

87

2

1,819

1,6

91

553

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

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

Nu

mb

er

of

To

rna

do

es

0

100

200

300

400

500

600

Nu

mb

er o

f De

ath

s

Number of Tornadoes

Number of Deaths

*Through July 4, 2012.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html

Number of Tornadoes and Related Deaths, 1990 – 2012*

Tornadoes claimed 553 lives in 2011, the most since 1925

872 tornadoes have been recorded so

far this year*

2012 Tornado Losses Got Off to an Ominous Beginning, but Slowed. First Half 2011 Insured Losses from Tornadoes and Thunderstorms Topped $21B.

U.S. Tornado Count, 2005-2012*

42

*Through July 9, 2012.Source: http://www.spc.noaa.gov/wcm/

There were 1,897 tornadoes in the US in 2011 far above

average, but well below 2008’s record

2012 count is running well behind 2011

June 29, 2012 Derecho: Traveled 600 Miles from Midwest to Mid-Atlantic

43Source: National Weather Service: http://www.spc.noaa.gov/wcm/2012/20120629-derecho.png

The June 29 derecho traveled

600 miles in just 10 hours—an average speed of 60 MPH! Peak wind gusts

80-100 MPH.

Millions of people were without power

in sweltering heat for days, particularly in Mid-Atlantic states

10-HOUR RADAR COMPOSITE (2PM – MIDNIGHT)

Location of Tornadoes in the US, 2012*

*Through July 4, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html# 44

874 tornadoes killed 68 people through

July 4

Location of Large Hail Reports in the US, 2012*

45*Through July 4, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#

There were 5,452 “Large Hail”

reports through July 4, 2012,

causing extensive damage to homes,

businesses and vehicles

Location of Wind Damage Reports in the US, 2012*


There were 6,851 “Wind Damage” reports through July 4, causing

extensive damage to homes and,

businesses

Severe Weather Reports, 2012*


There were already 13,177 severe weather reports through

July 4; including 874

tornadoes; 5,452 “Large Hail” reports

and 6,851 high wind events

Severe Weather Reports, 2011

48Source: NOAA Storm Prediction Center; 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

49

$1

2.3

$1

0.7

$3

.7

$1

4.0

$1

1.3

$6

.0

$3

3.9

$7

.4 $1

5.9

$3

2.9

$7

1.7

$1

0.3

$7

.3

$2

8.5

$1

1.2

$1

4.1

$3

2.3

$3

.4

$1

3.7

$4

.7

$7

.8

$3

6.9

$8

.6

$2

5.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

US Insured Catastrophe Losses

*PCS figure for Q1 2012.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 5th Highest in US History on An Inflation-

Adjusted Basis

Q1 2012 CAT losses were up $1.2B or 55% from $2.2B in Q1 2011

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

49

50

Top 14 Most Costly Disastersin 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.

$9.0$11.9 $13.1

$19.1$21.3

$24.0 $25.0

$47.6

$8.5$7.7$6.5$5.5$4.4$4.3

$0$5

$10$15$20$25$30$35$40$45$50

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

SpringTornadoes& Storms*

(2011)

9/11Attack(2001)

Andrew(1992)

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and storm season was

the 4th costliest event in US insurance history

Hurricane Irene became the 11th most expense

hurricane in US history

51

Federal Disaster Declarations Patterns: 1953-2012

2012 Declarations Running Well Below Record 2011/2010 Pace

Number of Federal Disaster Declarations, 1953-2012*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

91

9

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

*Through July 12, 2012.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011, though 2012 Pace Is Well Below Prior Two Years

The number of federal disaster declarations set a

new record in 2011, with 99, shattering 2010’s record 81

declarations.

There have been 2,064 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.

19 federal disasters were declared through

July 12, 2012

52

53

Federal Disasters Declarations by State, 1953 – 2012: Highest 25 States*

86

78

71

65

64

58

56

56

53

53

51

51

50

48

48

48

48

47

47

45

45

45

42

40

39

0

10

20

30

40

50

60

70

80

90

100

TX CA OK NY FL LA AL KY AR MO IL TN MS IA MN WV KS NE PA OH VA WA ND NC IN

Dis

as

ter

De

cla

rati

on

s

*Through July 12, 2012.

Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Over the past nearly 60 years,

Texas has had the highest number of Federal Disaster

Declarations

54

Federal Disasters Declarations by State, 1953 – 2012: Lowest 25 States*

39

39

37

36

35

34

33

29

28

27

26

26

25

24

24

23

22

21

17

17

17

15

14

11

10

9 9

0

10

20

30

40

50

ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC UT RI WY

Dis

as

ter

De

cla

rati

on

s

*Through July 12, 2012. Includes Puerto Rico and the District of Columbia.

Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Over the past nearly 60 years, Utah and Rhode Island had the fewest

number of Federal Disaster Declarations

55

P/C Insurance Industry Financial Overview

Profitability Recovery in 2012 (and Setback in 2011) Were

Largely Associated With Catastrophe Activity

P/C Net Income After Taxes1991–2012:Q1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,1

50

$1

0,1

41

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12:Q1

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012:Q1 ROAS1 =

7.2%

P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due

primarily to lower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute 56

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.9

97.6

106.4

95.78.2%

4.6%

7.6%7.4%4.4%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012:Q10%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Year Ago

2011:Q1 = 102.2, 6.1% ROE

57

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*1

2:

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q1*

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% 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

10 Years9 Years

2011:4.6%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2012:Q8.2%

58

59

-5%

0%

5%

10%

15%

20%

25%

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

Premium Growth Is Up Modestly: More in 2012?

(Percent)1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: 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.

2012:Q1 growth

was +3.1%

60

P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter

Sources: ISO, Insurance Information Institute.

The return to positive premium growth in part reflects pressure on property lines due to elevated catastrophe losses

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

7% 3.5%

1.6%

4.1%

3.8%

3.1%

-10%

-5%

0%

5%

10%

15%

20%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

In early 2012 premium growth appeared to

decelerate

61

Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2012)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute

KRW Effect

Pricing as of Q1:2012 was positive for only the third time since 2003. Slightly

stronger gains in Q4.

(Percent)

Q2 2011 marked the 30th

consecutive quarter of price

declines

62

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2012:Q1

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Percentage Change (%)

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

KRW : No Lasting Impact

Pricing turned positive in Q3:2011, the first increase in

nearly 8 years; Q1:2012 renewals were up 4.4%

63

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2012:Q11999:Q4 = 100

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Despite 3 consecutive quarters of gains

(Q1:2012 = 4.4%), pricing today is where is was in

early 2001 (pre-9/11)

Upward pricing pressure is small for large accounts, 4.1% in

Q1:2012, vs. 4.2% for small accounts and

4.9% for medium accounts

64

Change in Commercial Rate Renewals, by Line: 2012:Q1

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Major Commercial Lines Renewed Uniformly Upward in Q1:2012 for Only the Third Time Since 2003; Property Lines

& Workers Comp Leading the Way

Percentage Change (%)

3.8% 4.0% 4.0%

6.5%

7.4%

0.8%

2.0%

3.1% 3.1% 3.3% 3.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Su

rety

EP

L

Co

mm

l Au

to

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

D&

O

Co

nst

ruct

ion

EP

L

Bu

s.In

terr

up

tion

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

Workers Comp rate increases are large than any other line, followed

by Property lines

UNDERWRITING

65

Catastrophes Will Lead Insurers their Largest

Underwriting Loss in a Decade

66

P/C Insurance Industry Combined Ratio, 2001–2011*

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=106.4 Sources: A.M. Best, ISO.

95.7

99.3100.8

106.4

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

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

Homeowners Insurance Combined Ratio: 1990–2012F

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

94

.4 10

0.3

88

.9 95

.6

11

6.8

10

5.7

10

6.7

12

3.7

10

5.0

11

8.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12F

Homeowners Performance Deteriorated in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be

Expected Due to Local Catastrophe Loss Activity

Sources: A.M. Best (1990-2012E); Insurance Information Institute. 67

Underwriting Gain (Loss)1975–2012:Q1*

* Includes mortgage and financial guaranty insurers in all yearsSources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment; 2012:Q1 Underwriting Loss Was -0.2

Bill.

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Cumulative underwriting deficit from 1975 through

2011 is $479B

($ Billions) Underwriting losses in

2011 totaled

$36.5B, the largest since

2001

68

69

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.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

4.4

8.0

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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 2010s: 6.20*

Combined Ratio Points

Financial Strength & Underwriting

70

Cyclical Pattern in P-C Impairment History is Directly Tied to

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20118

15

12

71

19

33

91

31

21

99

15

14

14

36

50

30 3

34

8 49

55

60

59

41

28

16

12

32

17 2

04

8 49

47

37

19

13 1

6

16 1

9 21

34

5

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 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.

71

72

Reasons for US P/C Insurer Impairments, 1969–2010

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy 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 GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

SURPLUS/CAPITAL/CAPACITY

73

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

74

Policyholder Surplus, 2006:Q4–2012:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6

$550.3

$570.7$566.5

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1

2011:Q1Previous Surplus Peak

Quarterly Surplus Changes Since 2011:Q1 Peak

11:Q2: -$7.4B (-1.0%)11:Q3: -$27.9B (-4.6%)11:Q4: -$16.2B (-2.5%)12:Q1: +$3.2B (+0.7%)

Surplus as of 3/31/12 hit an all time record high of $570.7B, 0.7% or $3.2B

above the previous record set as of 3/31/11.

*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 $0.80 of NPW, close to the strongest claims-

paying status in its history.

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100%

150%

200%

250%

300%

350%

400%

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500%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Annual statistics

Long-term statistics

Information on significant natural disasters

Focus analyses

NatCatSERVICE methodology, info brochure

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Long-term statistics

Information on significant natural disasters

Focus analyses

NatCatSERVICE methodology, info brochure

Publication Topics Geo

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ContentsContents

Natural Catastrophes in North AmericaPerils, Risks and Insurance

Perils Risks

‒ Climate change and climate variability

‒ Risk map of North America Insurance

‒ Insurance aspects in the United States and Canada

‒ Agricultural insurance

‒ Weather derivatives Message to the Market

Perils Risks

‒ Climate change and climate variability

‒ Risk map of North America Insurance

‒ Insurance aspects in the United States and Canada

‒ Agricultural insurance

‒ Weather derivatives Message to the Market

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2012 HALF-YEAR NATURAL CATASTROPHE REVIEW July 13, 2012