After the Crisis:Workers Compensation Overview and Outlook for 2011 & Beyond

Business Insurance Virtual Workers Compensation Conference

Keynote Presentation

December 16, 2011Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Presentation Outline

Workers Compensation and the Economy Regional Differences in Recession and Recovery Labor Markets: Overview & Outlook Payroll/Employment Exposure Trends

Workers Compensation Operating Environment Premium & Rate Trends Profitability Underwriting Performance Medical & Indemnity Claim Cost Trends Residual Market and State Fund Market Share and Performance Investment Market Impacts

P/C Insurance Industry Overview The Global Economic Storm: Financial Crisis & Recession

Crisis-Driven Exposure Issues: Commercial Lines Exposure, Growth & Profitability

3

Workers Compensation and the Economy

Workers Comp Exposure and Performance is Intimately Linked to

the Economy and Labor Market

4

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/10; Insurance Information Institute.

2.7

%

0.9

%

3.2

%

2.3

%

2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.7

%

1.7

%

2.0

%

2.3

%

2.5

%

2.7

%

3.0

%

3.2

%

4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

Demand Commercial Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will

Compound and Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

Economic growth up sharply in late 2009 with rebuilding

of inventories and stimulus. More moderate growth

expected in 2010/11 but no “double dip”

5

Length of US Business Cycles,1929–Present*

10 1116

6

168 8

19

50

80

3745

39

24

106

36

58

12

92

120

73

17

43

138 11 10 8

0

10

20

30

40

50

60

70

80

90

100

110

120

Aug1929

May1937

Feb1945

Nov1948

Jul1953

Aug1957

Apr1960

Dec1969

Nov1973

Jan1980

Jul1981

Jul1990

Mar2001

Dec2007

Month Recession Started

Contraction Expansion Following

*Through Nov. 2010. Most recent recession began Dec. 2007 and ended June 2009. ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

Average Duration**Recession = 10.4 MosExpansion = 60.5 Mos

Length of Expansions Greatly Exceeds

Contractions

Duration (Months) The “Great Recession”

lasted 19 months, longest

since Great Depression

6

Wage & Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)

Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessions. **Estimated “official” end of recession June 2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books

Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums; Nearly 29% of NPW Has Been Eroded Away by the Soft Market and Weak Economy

7/90-3/91 3/01-11/01

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$0

$10

$20

$30

$40

$50

$60

Wage & SalaryDisbursements

WC NPW

WC net premiums written were down $13.7B or 28.7%

to $34.1B in 2009 after peaking at $47.8B in 2005

12/07-6/09**

Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)

*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).

-4.4%

-2.0%-1.1%

1.1%

3.7%4.6%

8.5%

3.5%

2.1%

-0.5%

-3.6%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

Recessions in the 1970s and 1980s saw smaller exposure impacts

because of continued wage inflation, a factor not present

during the 2007-2009 recession

The Dec. 2007 to mid-2009 recession

caused the largest impact on WC

exposure in 60 years

(Percent Change)

(All Post WWII Recessions)

Recession Dates (Beginning/Ending Years)

2-Year Change in Countrywide NWP -23%

Known Pricing Impacts

Change in Bureau Rates and Loss Costs -7%

Change in Carrier Pricing -4%

Economic Impacts

Change in Total Payroll -4%

Impact of Recession on Industry Group Mix -4% to -6%

Impact of Recession by Firm Size -4% to -6%

Other Impacts +1% to -2%

Contributions to WCNet Written Premium DeclineCalendar Years 2007–2009

Source: NCCI

9

Total Wages, California2001-2009

$619.15 $614.54$630.69

$667.52

$703.99

$749.50

$790.44 $797.79

$753.97

$518

.60

$508

.16

$521

.08

$555

.40

$588

.32

$627

.54

$659

.99

$661

.15

$618

.17

$400

$450

$500

$550

$600

$650

$700

$750

$800

$850

2001 2002 2003 2004 2005 2006 2007 2008 2009p

All Employers Private Employers

Source: http://data.bls.gov

Recessions Cause Payrolls to Shrink. The 2001 Recession Saw a 2.0% Decline in Private Wages; the 2008-09 Dropoff was 6.3%.

Billions

Private sector wages fallen sharply in hard hit states like

California--$43B or 6.5%

10

Real GDP Growth vs. Real P/CPremium Growth: Modest Association

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/10; Insurance Information Institute

4.3

%1

8.6

%2

0.3

%5

.8%

0.3

%-1

.6%

-1.0

%-1

.8%

-1.0

%3

.1%

1.1

%0

.8%

0.4

%0

.6%

-0.4

%-0

.3%

1.6

% 5.6

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.3%

-1.6

%

5.2

%-0

.9%

-7.4

%-6

.5% -1

.5%

1.8

%

-10%

-5%

0%

5%

10%

15%

20%

25%

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

E

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

Real NWP Growth Real GDP

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Real GDP Growth vs. Real P/C (%)

11

Regional Differences Will Significantly Impact P/C Markets

Recovery in Some Areas Will Begin Years Ahead of Others

and Speed of Recovery Will Differ by Orders of Magnitude

16

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

17

Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilized in 2010

2

4

6

8

10

12

14

16

18

Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Oct.10

Unemployment rate was 9.6% in

October

Unemployment peaked at 10.1%

in Oct. 2009, highest monthly rate since 1983.

Peak rate in the last 30 years: 10.8% in Nov -

Dec 1982

Source: US Bureau of Labor Statistics; Insurance Information Institute.

U-6 went from 8.0% in March

2007 to 17.5% in Oct 2009; Stood at 17.0% in Sep.

2010

January 2000 through October 2010, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

18

US Unemployment Rate

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.7

%

9.6

%

9.6

%

9.4

%

9.3

%

9.1

%9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

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

Rising unemployment eroded payrolls

and workers comp’s exposure base.

Unemployment likely peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/10); Insurance Information Institute

2007:Q1 to 2011:Q4F*

Unemployment forecasts remain stubbornly high

through 2011

-72

-14

4-1

22

-16

0-1

37

-16

1-1

28

-17

5-3

21

-38

0-5

97

-68

1-7

79

-72

6-7

53

-52

8 -38

7-5

15 -3

46 -2

12

-22

5-2

24

64

-10

91

4 39

20

8 31

3 43

2-1

75 -6

6-1

-41

15

1

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-0

8A

ug

-08

Se

p-0

8O

ct-0

8N

ov-

08

De

c-0

8Ja

n-0

9F

eb

-09

Ma

r-0

9A

pr-

09

Ma

y-0

9Ju

n-0

9Ju

l-09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-1

0A

ug

-10

Se

p-1

0O

ct-1

0

Monthly Change in Employment

January 2008 through October 2010* (Thousands)

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 7.5 Million Through October 2010;

14.8 Million People are Now Defined as Unemployed

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

The job gain and loss figures for much of 2010 were severely distorted by the hiring and

termination of temporary Census workers. So far in 2010, 874,000 nonfarm jobs have been created.

151,000 jobs were created in October and losses in

Sept. and Aug. were revised sharply downward

23

US Nonfarm Private Employment1

38

.01

38

.11

38

.01

37

.91

37

.81

37

.81

37

.71

37

.61

37

.61

37

.41

37

.01

36

.71

36

.21

35

.11

33

.51

32

.81

32

.11

31

.51

31

.21

30

.61

30

.31

30

.11

29

.91

29

.61

29

.71

29

.61

29

.61

29

.61

29

.81

30

.21

30

.61

30

.41

30

.41

30

.41

30

.31

30

.5

129130131132133134135136137138139

No

v 0

7D

ec

07

Jan

08

Fe

b 0

8M

ar

08

Ap

r 0

8M

ay

08

Jun

eJu

l 08

Au

g 0

8S

ep

08

Oct

08

No

v 0

8D

ec

08

Jan

09

Fe

b 0

9M

ar

09

Ap

r 0

9M

ay

09

Jun

09

Jul 0

9A

ug

09

Se

p 0

9O

ct 0

9N

ov

09

De

c 0

9Ja

n 1

0F

eb

10

Ma

r 1

0A

pr

10

Ma

y 1

0Ju

n 1

0Ju

l 10

Au

g 1

0S

ep

10

Oct

10

Monthly, Nov 2007 – October 2010 (Millions)

The US Economy Lost About 8.4 Million Jobs in the Two

Years from Dec. 07 – Dec. 09.

As employment expands, workers comp will be among the first lines to see exposure

gains

Employment Peak; Recession Starts

Seasonally adjusted. Source: US Bureau of Labor Statistics

14 39

20

8

31

3

43

2

-17

5

-66

-1

-41

15

1

16 6

2

15

8 24

1

51 61 1

17

14

3

10

7 15

9

(300)

(200)

(100)

0

100

200

300

400

500

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-1

0

Au

g-1

0

Se

p-1

0

Oct

-10

Total Employment Private Employment

Monthly Change in Employment: Total vs. Private Employment

January 2010 through October 2010* (Thousands)

The Private Sector Posted Job Gains Every Month in 2010—Totaling 1.115 Million through October. The Government

Sector Continues to Lose Jobs.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

The job gain and loss figures for much of 2010 were severely distorted by the hiring and

termination of temporary Census workers. So far in 2010, 874,000 nonfarm jobs have been created.

159,000 private jobs were created in October while 8,000

government jobs were lost

Job Creation: Jan. – Oct. 2010

Total: 874,000 Private: 1,115,000

25

Change in Employment Level for Select Industries, Oct. 2010 vs. Sept. 2010

-1.0

46.0

34.0

-5.0

24.4

-1.0

-0.1

27.9

-3.0

5.07.0

-10

0

10

20

30

40

50

Min

ing

&L

og

gin

g

Co

nst

ruct

ion

Ma

nu

fact

urin

g

Re

tail

Tra

de

Tra

nsp

ort

atio

n

Info

rma

tion

Fin

an

cia

l

Pro

f.B

usi

ne

ssS

erv

.

He

alth

Ca

re

Le

isu

re &

Ho

sp.

Fo

od

Se

rvic

e&

Drin

kin

gP

lace

s

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery

Change in Thousands

Health, Leisure, Professional Business Services and Retail Trade

are the job growth leaders today.

27

Total Wages, California2001-2009

$619

.15

$614

.54

$630

.69

$667

.52

$703

.99

$749

.50

$790

.44

$797

.79

$753

.97

$518

.60

$508

.16

$521

.08

$555

.40

$588

.32

$627

.54

$659

.99

$661

.15

$618

.17

$400

$450

$500

$550

$600

$650

$700

$750

$800

$850

2001 2002 2003 2004 2005 2006 2007 2008 2009p

All Employers Private Employers

Source: http://data.bls.gov

Recessions Cause Payrolls to Shrink. The 2001 Recession Saw a 2.0% Decline in Private Wages; the 2008-09 Dropoff was 6.3%.

Billions

Private sector wages paid in CA fell $43 billion

6.5% in 2009

28

2006-2010: 3-Month Percent Changein Average Hourly Earnings*

0.0

0.5

1.0

1.5

Jun

06

Jan

07

Jul 0

7

Jan

08

Jul 0

8

Jan

09

Jul 0

9

Jan

10

Aug

10

*3-month net change, seasonally adjustedSource: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

Average Hourly Earnings* Grew Every Month Throughout the Recession. Weakest Growth Was April-June 2010, But That Weakness Appears to be Over.

Percent

Workers Compensation Operating Environment

31

The Weak Economy and Soft Market Have Made the Workers Comp Operating

Increasingly Challenging

Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium

$ Billions

Calendar Yearp Preliminary

Source: 1990–2008 Private Carriers, Best's Aggregates & Averages; 2009p, NCCI1996–2009p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

33

Workers Compensation Net Premiums Written and Annual Growth Rates: 1970-2010P

$3.5

$41.

8

$30.

5

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

WC

Ne

t P

rem

ium

s W

ritt

en

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

An

nu

al %

Ch

an

ge

in W

C N

PW

WC Net Premiums Written

Annual % Change in NPW

($ Billions)

Sources: A.M. Best (1973-2009); Insurance Information Institute calculations and estimates for 2010.

WC premium growth hit a 40+ year low in

2009 at -13%. Improving labor

market should help beginning in 2010.

Average Approved BureauRates/Loss CostsHistory of Average WC Bureau Rate/Loss Cost Level Changes

12.1

7.4

10.0

2.9

-6.4

-3.2

-6.0

-8.0

-5.4

-2.6

3.5

1.2

4.9

6.6

-6.0-5.1

-5.7-6.6

-3.1-2.4

-1.4

-10

-5

0

5

10

15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20092010*

Percent

Calendar Year* States approved through 4/23/2010Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization

Cumulative1990–1993

+36.3%

Cumulative 2000–2003

+17.1%

Cumulative 2004–2010

-26.7%

Cumulative 1994–1999

-27.8%

*States approved through 4/23/10.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.

35

Comparison of State WC rates

Source: Oregon Workers’ Compensation Premium Rate Ranking 2008. Rates weighted by Oregon’s distribution of exposures by classification

WC rates, on average, do not appear to be significantly higher or lower in states with workers comp state funds

California’s WC rates are about average

Workers Compensation Combined Ratio: 1973–2012P

96

.8 99

.91

01

.1 10

4.2

10

3.6

99

.49

6.4

10

1.4

10

2.8

10

3.9

11

2.5

12

1.9

11

8.8

12

1.1

11

7.6

11

8.4

11

8.2

11

7.4 12

2.6

12

1.5

10

9.1

10

2.0

97

.0 10

0.0

10

1.0

10

7.0

11

5.3 11

8.2

12

1.7

11

0.9

11

0.0

10

7.0

10

2.7

98

.41

03

.51

04

.31

09

.81

16

.01

17

.01

17

.0

80

85

90

95

100

105

110

115

120

125

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11P

Workers Comp Underwriting Results Are Deteriorating Markedly

Sources: A.M. Best; Insurance Information Institute.

$ Billions

Calendar Year

2

5

10

15

1820

21

18

15

12

6

99

42

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2009 Tabular Discount Is $5.3 Billion

Considers all reserve discounts as deficienciesLoss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selectionsSource: NCCI analysis

WC Loss and LAE Reserve Deficiency: Private Carriers

Calendar Year Reserve Deficiency Increased in 2009

38

Return on Net Worth for Workers Comp: NC vs. US and NC All P-C Lines,1999-2008

Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

99 00 01 02 03 04 05 06 07 08

US WComp NC WComp NC P-C All Lines

(Percent)Workers comp

profitability in NC has generally

underperformed the US and NC P-C overall

Average 1999-2008

US WC: 6.4%

NC WC: 4.5%

NC All Lines: 10.9%

Percent

Calendar Year

9

1618

17

2224

26

2928

24

43

5

1113 13

1210

86

53

17

11

8

0

5

10

15

20

25

30

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09p

*NCCI Plan states plus DE, IN, MA MI, NJ, NCp: PreliminarySource: NCCI.

WC Insurance Plan States*Premium as a Percentage of Direct Written Premiums

WC Residual Market Shares Continue to Decline

Percent

Policy Year

178

166170 167

159

143

128

112

10397

115 117113 114

107 107 105 105112 115 115117

95100 102

75

95

115

135

155

175

195

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*

*Incomplete policy year projected to ultimate.Source: NCCI.

NCCI-Serviced WC Residual Market Plansas of December 31, 2009

WC Residual Market Combined Ratio

41

WC Competitive State Fund Market Share,1996 – 2009p

22.4%

26.4% 25.4%

21.0%

16.9%15.2%

14.1%12.7%

18.7%

12.9%10.8%10.2%10.0%10.6%

0%

5%

10%

15%

20%

25%

30%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Market Share (%) Private insurance markets are highly competitive. State

fund market shares have been falling steadily since 2003.

Competition, favorable underwriting trends, coverage options, private insurer innovations in risk management have all helped to make the private

sector WC insurance the most attractive option in most cases

Source: 1990–2008 Private Carriers, Best's Aggregates & Averages; 2009p, NCCI, Insurance Information Institute Market Share calculations1996–2009p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent; p: Preliminary

42

Workers Compensation State Fund Market Shares, 2008

100.

0

100.

0

100.

0

100.

0

87.4

67.2

65.4

61.3

60.8

58.3

56.4

52.2

47.4

38.7

35.1

31.5

29.2

26.5

24.9

24.3

22.6

22.3

14.4

11.0

10.9

0

20

40

60

80

100

ND OH WA WY WV MT CO ME RI ID OR UT AZ NY OK NM TX LA MD KY CA HI MO MN PA

Sta

te F

und

Mar

ket S

hare

(%)

Source: Conning; Insurance Information Institute.

State funds market shares among the 21 competitive state funds vary widely, from nearly 90% in WV (in transition from a monopolistic to a competitive

fund market) to barely 10% in PA

Workers Compensation Medical & Indemnity Claim Cost Trends

44

Rising Medical Costs Exert Pressure While Indemnity Costs Rise Well Ahead of

Wage Inflation

$8.5 $8.6 $8.4$9.2 $9.6$10.3

$11.4$12.3

$13.6$14.6

$16.6$18.0

$19.2$20.3

$21.9$23.0

$24.3$25.9

$27.2

$5

$10

$15

$20

$25

$30

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09p

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2009: +6.6%

Accident Year

MedicalClaim Cost ($000s)

2009p: Preliminary based on data valued as of 12/31/20091991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

Cumulative Change = 224%(1993-2009p)

Workers Comp Medical Claim Costs Continue to Rise

4.5%

3.5%2.8%

3.2% 3.5%4.1%

4.6% 4.7%4.0%

4.4% 4.2% 4.0%4.4%

3.7% 3.4%

5.1%

7.4%

10.1%

8.3%

10.6%

7.3%

13.5%

8.8%

7.3%

5.6%

7.4%

5.4% 5.4%

6.7%

5.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Change in Medical CPI

Change Med Cost per Lost Time Claim

WC Medical Severity Risingat Twice the Medical CPI Rate

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Average annual increase in WC medical severity form 1995 through 2009 was nearly twice the medical CPI (7.6% vs.

3.9%). New healthcare reform legislation is unlikely to have any

impact on the gap.

WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

2.7%

1.8%

6.9%

3.0% 3.0%3.4%

3.1%3.4%

0%

2%

4%

6%

8%

Overall CPI "Core" CPI HospitalServices

Physicians'Services

DentalServices

PrescriptionDrugs

Medical CareCommodities

Medical CPI

(Percent increase Dec 08 to Dec 09)

Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least

47

Excludes Food and Energy

Inpatient Services Rose 6.7%;

Outpatient Services Rose 7.4%

48

Workers Compensation Lost-Time Claim Frequency Continues to Decline*

-4.4

%

0.3

%

-6.5

%

-4.5

%

0.5

%

-3.9

%

-2.3

%

-4.5

%

-6.9

%

-4.5

%

-4.1

%

-3.7

%

-6.6

%

-6.2

%

-3.0

%

-3.4

%

-4.0

%

-9.2

%

-4.2

%

-10%

-8%

-6%

-4%

-2%

0%

2%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09P

(Percent) Lost-Time Claims

Claim frequency fell in 4.0% in 2009, in part due to the recession

Cumulative Change of -54.7%

(1991 – 2008)

2009p: Preliminary based on data valued as of 12/31/2009; *Frequency is defined as the number of lost-time claims per 100,000 workers.1991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds; Excludes the effects of deductible policies

49

Frequency: 1926–2008A Long-Term Drift Downward

Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research

Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers

0

5

10

15

20

25

30

'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07

Med Costs Share of Total Costs is Increasing Steadily

Indemnity53%

Medical47%

Source: NCCI (based on states where NCCI provides ratemaking services).

Indemnity48%

Medical52%

Indemnity42%

Medical58%1989

1999

2009p

WC Med Cost Will Equal 2/3 of Total by 2019 if Trends Hold

Source: Insurance Information Institute.

Indemnity33%

Medical67%

2019 Estimate

This trend will likely be

supported by the increased labor

force participation of workers age 55

and older.

Indemnity Claim Cost Trends

52

Indemnity Costs Continue to Rise at a Pace Above Wage Inflation

$1

0.0

$9

.7

$9

.4

$9

.9

$1

0.1

$1

0.7

$1

1.5

$1

2.5

$1

3.8

$1

5.3

$1

6.7

$1

7.3

$1

8.0

$2

2.0

$2

3.0

$2

0.8

$1

9.8

$1

8.3

$1

8.8

+5.0%

+1.0%-3.1% -2.8%+4.9%+1.7%+5.9%

+7.7%+9.0%

+10.1%

+10.1%

+9.2%+3.1%+4.1%+1.7%

+3.1%+5.0%

5

7

9

11

13

15

17

19

21

23

25

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009p

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001: +7.3%Annual Change 2002–2008: +4.0%

2009p: Preliminary based on data valued as of 12/31/20091991–2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Accident Year

+4.5

Workers Comp Indemnity Claim Costs Continue to Grow

+5.8

4.2%

5.2%5.6%

4.7%

6.3%

2.3%

1.1%

2.7%

1.7%

4.7% 4.6%

2.3%

5.9%

7.7%

9.0%

10.1%

4.1%

1.7%

3.1%

5.0% 5.0%5.8%

4.5%

-1.0%

3.5%

3.6%

1.7%

10.1%

9.2%

3.1%

-2%

0%

2%

4%

6%

8%

10%

12%

1995 1997 1999 2001 2003 2005 2007 2009p

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

WC Indemnity Severity vs. Wage Inflation

2009p: Preliminary based on data valued as of 12/31/2009; 1991-2008: Based on data through 12/31/2008, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI

WC indemnity severity is once again outpacing

wage inflation

55

Dollar Change* in Average Hourly Earnings, June 2006 – August 2010

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30Ju

n 06

Jan

07

Jul 0

7

Jan

08

Jul 0

8

Jan

09

Jul 0

9

Jan

10

Jul 1

0

*3-month net change, seasonally adjustedSource: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

Average Hourly Earnings Grew at Least $0.05in Every 3-Month Period Since June 2006.

The pace of hourly earnings growth has

slowed dramatically since the onset of the

economic downturn

Where Will the Growth in WC Exposure Come From?

56

Industry and Occupation Growth Analysis

57

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

58

Fastest Growing Occupations, 2008–2018:Health/Science/Tech Dominate

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

OccupationsPercent change

Number of

new jobs(in thousands)

Wages (May 2008 median) Education/training category

Biomedical engineers 72 11.6 $ 77,400 Bachelor's degree

Network systems and data communications analysts

53 155.8 71,100 Bachelor's degree

Home health aides 50 460.9 20,460 Short-term on-the-job training

Personal and home care aides 46 375.8 19,180 Short-term on-the-job training

Financial examiners 41 11.1 70,930 Bachelor's degree

Medical scientists, except epidemiologists

40 44.2 72,590 Doctoral degree

Physician assistants 39 29.2 81,230 Master's degree

Skin care specialists 38 14.7 28,730 Postsecondary vocational award

Biochemists and biophysicists 37 8.7 82,840 Doctoral degree

Athletic trainers 37 6.0 39,640 Bachelor's degree

Physical therapist aides 36 16.7 23,760 Short-term on-the-job training

Dental hygienists 36 62.9 66,570 Associate degree

Veterinary technologists and technicians

36 28.5 28,900 Associate degree

Dental assistants 36 105.6 32,380 Moderate-term on-the-job training

Computer software engineers, applications

34 175.1 85,430 Bachelor's degree

Medical assistants 34 163.9 28,300 Moderate-term on-the-job training

Physical therapist assistants 33 21.2 46,140 Associate degree

Veterinarians 33 19.7 79,050 First professional degree

Self-enrichment education teachers

32 81.3 35,720 Work experience in a related occupation

Compliance officers, except agriculture, construction, health and safety, and transportation

31 80.8 48,890 Long-term on-the-job training

SOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

WC exposure growth the fastest in the health, science and tech areas

59

Occupations with Largest Numerical Growth, 2008–2018: Health, Services Dominate

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

Dollar growth in WC exposures should grow the most (at current rate levels) in the health and services industries

Occupations

Number of

new jobs(in thousands) Percent change

Wages (May 2008 median) Education/training category

Registered nurses 581.5 22 $ 62,450 Associate degree

Home health aides 460.9 50 20,460 Short-term on-the-job training

Customer service representatives 399.5 18 29,860 Moderate-term on-the-job training

Combined food preparation and serving workers, including fast food

394.3 15 16,430 Short-term on-the-job training

Personal and home care aides 375.8 46 19,180 Short-term on-the-job training

Retail salespersons 374.7 8 20,510 Short-term on-the-job training

Office clerks, general 358.7 12 25,320 Short-term on-the-job training

Accountants and auditors 279.4 22 59,430 Bachelor's degree

Nursing aides, orderlies, and attendants

276.0 19 23,850 Postsecondary vocational award

Postsecondary teachers 256.9 15 58,830 Doctoral degree

Construction laborers 255.9 20 28,520 Moderate-term on-the-job training

Elementary school teachers, except special education

244.2 16 49,330 Bachelor's degree

Truck drivers, heavy and tractor-trailer

232.9 13 37,270 Short-term on-the-job training

Landscaping and groundskeeping workers

217.1 18 23,150 Short-term on-the-job training

Bookkeeping, accounting, and auditing clerks

212.4 10 32,510 Moderate-term on-the-job training

Executive secretaries and administrative assistants

204.4 13 40,030 Work experience in a related occupation

Management analysts 178.3 24 73,570 Bachelor's or higher degree, plus work experience

Computer software engineers, applications

175.1 34 85,430 Bachelor's degree

Receptionists and information clerks

172.9 15 24,550 Short-term on-the-job training

Carpenters 165.4 13 38,940 Long-term on-the-job trainingSOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

Investment Performance

61

Investments Are a PrincipleSource of Declining Profitability

Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.0

$25.8

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:H1In 2008, Investment Gains Fell by 50% Due to Lower Yields and

Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income

Investment Gains Are Recovering So Far in 20101 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

($ Billions) 2009:H1 gain was $12.5B

Investment gains in 2010 are on track to be their best since 2007

64

Treasury Yield Curves: Pre-Crisis (July 2007) vs. October 2010

0.14% 0.13% 0.18% 0.23% 0.38%

1.85%

2.54%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

1.18%

0.57%

3.87%3.52%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

October 2010 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at least 45 years. Investment

income is falling as a result.

The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Further Depress Rates in the 7 to 10-Year Maturity Range

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

QE2 Target

65

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%-7%-6%-5%-4%-3%-2%-1%0%

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

War

rant

y

Surplu

s Line

s

Med

Mal

WC

Reinsu

ranc

e**

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

66

Profitability

Historically Volatile

P/C Net Income After Taxes1991–2010:H1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$1

6,5

31$2

8,3

11

-$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:H1

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:H1 ROAS = 6.3%

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized

capital gains vs. -$11.1B in previous realized capital losses

68

ROE: P/C vs. All Industries1987–2009*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

US P/C Insurers All US Industries

P/C Profitability IsCyclical and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s At Now

Combined Ratio / ROE

* 2009 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.5 100.1101.0

7.5%7.3%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010:H1*0%

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 generated a 7% ROE in 2009,10% in 2005 and 16% in 1979

71

The Economic Storm

What the Lasting Effects of the Financial Crisis and Recession

Mean for the Industry’s Exposure Base, Growth and Profitability

Crisis-Driven Exposure Drivers

72

Economic Obstaclesto Growth in P/C Insurance

73

(Millions of Units)

New Private Housing Starts, 1990-2011F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

0

0.5

6

0.6

0 0.7

6

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners InsurersDue to Weak Home Construction Forecast for 2010-2011.

Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged 34% from 2005-2007; drop

through 2009 was 72% (est.); A net annual decline of 1.49 million units,

lowest since records began

in 1959

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is

estimated at about $1.3 billion

74

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3729

,059

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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 0910

:H1

Business Bankruptcy Filings,1980-2010:H1

Source: American Bankruptcy Institute; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines. There Are Some Preliminary Indications that Business

Bankruptcies Are Beginning to Decline.

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:H1

bankruptcies totaled 29,059, down 4% from H1:2009, but still very high by historical standards.

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

75

Private Sector Business Starts,1993:Q2 – 2009:Q4*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

199

191 19

317

117

716

918

0

203

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of September 12, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

(Thousands)

180,000 businesses started in 2009:Q4, the best quarter in 2009. 2009 was the slowest year for new

business starts since 1993.

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Ju

n 1

0

Recovery in Capacity Utilization is a Positive Sign for Insurance Exposure

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 76

Percent of Capacity Utilized (Manufacturing, Mining, Utilities)

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the demand for insurance

Manufacturing capacity stood at

74.8% in July 2010, above the June 2009 low of 68.2% but well below the pre-crisis

peak of 80%+

Recession began December 2007

P/C Premium Growth Primarily Driven by the

Industry’s Underwriting Cycle, Not the Economy

77

78

-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 0910

F

Soft Market Appears to Persist in 2010 but May Be Easing: Relief in 2011?

(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.

NWP was flat with 0.0% growth in 10:H1 vs. -4.4% in 09:H1

79

Direct Premiums Written: Commercial Lines Percent Change by State, 2004-2009

65.0

33.0

32.2

29.7

22.2

21.0

20.6

20.6

20.2

15.1

13.6

13.1

11.5

8.8

8.7

8.0

7.2

6.7

6.2

5.8

2.6

2.1

1.6

1.2

0.3

05

10152025303540455055606570

ND

SD

WV LA MT

OK

WY

NE IA KS

DC

MS

UT

NM TX SC

NY

CO FL ID AK

NC AL

AR

MO

Pec

ent c

hang

e (%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota led the way—by far—with a 65% increase

in premiums written over the past 5 years

27 states and DC had positive premium growth

over the past 5 years

80

0.0

-0.1

-0.1

-3.1

-3.8

-4.0

-4.4

-4.4

-6.2

-8.5

-9.7

-10

.2

-22

.7

-16

.0

-12

.6-10

.6

-10

.4-8.3

-2.3

-2.2

-1.9

-6.5

-6.9

-7.1

-7.3

-7.8

-30

-25

-20

-15

-10

-5

0

5

KY WI

VA

MN

WA IN GA

PA

TN VT

MD NJ

CA HI

ME

OR IL AZ

MA

CT

OH

DE RI

NV

NH MI

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Direct Premiums Written: Commercial Lines Percent Change by State, 2004-2009

Bottom 25 States

23 states had negative commercial premium growth

over the past 5 years

81

Average Commercial Rate Change,All Lines, (1Q:2004–3Q:2010)

-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% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-6.4

% -5.2

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

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

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Magnitude of Price Declines Shrank

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

Performance, Higher Cat Losses and

Costlier Reinsurance

(Percent)

Market Remains Soft as Capital Restored and

Underwriting Losses Remain Modest

82

Change in Commercial Rate Renewals, by Line: 2010:Q3

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

Most Major Commercial Lines Renewed Down in Q3:2010 at a Pace Similar to that of a Year Earlier

Percentage Change (%)

-3.7%

-2.8% -2.7%

0.3%

-5.2% -5.6% -5.3%-4.7%

-4.4% -4.2%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%All C

omm

ercia

l

GL

Comm

l Pro

p

Comm

l Aut

o

Umbr

ella

Const

ructi

on

D&OBus

. Int

erru

ptio

n

EPLSur

ety

83

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q3

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

Percentage Change (%)

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since KRW Effect

Market has Been Soft for 6+ years and Remains Soft as Capital is Restored and

Underwriting Losses Remain Modest

84

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q3

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

1999:Q4 = 100

Pricing today is where is was in

Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for

larger risks

Capital/PolicyholderSurplus (US)

85

Shrinkage, but Not Enoughto Trigger Hard Market

87

Policyholder Surplus, 2006:Q4–2010:Q2

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

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

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

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2009:Q1 Trough

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: -$10.2B (-1.9%)

Surplus set a new record in 2010:Q1*

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business

88

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

3.3%

9.6%

6.9%

10.9%

6.2%

13.8%

16.2%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Overthe Past 20+ Years

(Percent)

89

* 2010 NWP and Surplus figures are % changes as of H1:10 vs H1:09. Sources: A.M. Best, ISO, Insurance Information Institute

Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

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*

NWP % change Surplus % change

(Percent)

Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market

Surplus growth is now positive but premiums

continue to fall, a departure from the historical pattern

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