Economic Factors Affecting the Workers Compensation Market: An Overview and Outlook Workers Compensation Educational Conference Orlando, FL August 21,

Economic Factors Affecting the Workers Compensation Market:

An Overview and OutlookWorkers Compensation Educational Conference

Orlando, FLAugust 21, 2012

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

2

Growth Will Expand Workers Comp Payroll Exposure Base

2

America’s Manufacturing Renaissance?Construction Activity Still Depressed?

3

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/12; Insurance Information Institute.

2.7

%0

.5%

3.6

%3

.0%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%-0

.3%

1.4

%5

.0%

2.3

%2

.2%

2.6

%2

.4%

0.1

%2

.5%

1.3

%4

.1%

2.0

%1

.5%

1.7

%1

.9%

1.8

%2

.4%

2.7

%2

.9%

-8.9%

4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

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

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

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%

2012 is expected to see slow and choppy growth

before accelerating modestly in 2013

Percent Change in Real GDPby State, 2011

Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute. 4

Growth varied considerably across states

but in total was weak in 2011

with US overall growth at just

1.7%

TX has been an economic

growth leader

74

.4

73

.6

73

.6

72

.2

73

.6 76

67

.8

68

.9

68

.2

67

.7 71

.6 74

.5

74

.2 77

.5

67

.5 69

.8

74

.3

71

.5

63

.7

55

.7 59

.4

60

.9 64

.1

69

.9

75

.0

75

.3

76

.2

76

.4 79

.3

73

.2

72

.3

73

.6

40

45

50

55

60

65

70

75

80

85

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Consumer Sentiment Survey (1966 = 100)

January 2010 through August 2012

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact

consumers, but improved substantially in late 2011 and early 2012

Source: University of Michigan; Insurance Information Institute

Optimism among consumers Increased in August, and is well above year-ago levels; Suggests concern, but not fear on the part

of consumers.

5

6

16.9

16.5

16.1

13.2

10.4

11.6 12

.7

14.3 14

.7

14.7 15

.1

15.4

15.5

15.4

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2022F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); 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

7

(Millions of Units)

New Private Housing Starts, 1990-2022F

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

1

0.5

5

0.5

9

0.6

1 0.7

5 0.8

9

1.3

4

1.2

3

1.3

2

1.3

81

.42

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 10 11 12F13F14F15F16F17F 18-22F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); 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

8

Construction Employment,Jan. 2010—July 2012*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,59

3

5,52

9 5,55

2

5,55

9

5,51

8

5,50

7

5,49

1 5,51

1

5,49

2

5,49

9

5,48

8

5,47

7

5,45

6

5,48

9

5,49

6

5,49

5

5,49

8

5,49

5

5,50

8

5,49

8

5,52

8

5,51

9

5,52

0 5,54

6 5,56

4

5,56

3

5,54

9

5,54

2

5,51

0

5,51

4

5,51

3

5,400

5,450

5,500

5,550

5,600

5,650

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

2/30

/210

2

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Construction employment is still below where it was in

Jan. 2010. In a normal recovery, construction employment would be

growing robustly

(Thousands)

9

Value of Construction Put in Place, June 2012 vs. June 2011*

-3.7%

-27.5%

-2.9%

7.0%

13.1% 12.1% 14.0%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue

Growth (%)

Private sector construction activity is up in both the residential and nonresidential segments

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +13.1% Public: -3.7%

Public sector construction activity remains depressed

10

Value of Private Construction Put in Place, by Segment, June 2012 vs. June 2011*

6.6% 7.0%

18.8%

-10.5%

-5.2%

17.1%

-1.7%

26.5%

19.0%

13.1% 12.1%14.0%

26.3%

6.6%

-15%-10%

-5%0%5%

10%15%20%25%30%

To

tal

Pri

vate

Co

nstr

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Lo

dg

ing

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Reli

gio

us

Am

usem

en

t &

Rec.

Tra

nsp

ort

ati

on

Co

mm

un

icati

on

Po

wer

Man

ufa

ctu

rin

g

Private Construction Activity is Up in Most Segments, Including Residential Construction but Led by Power

Growth (%) Led by the Power industry, Private sector construction activity is up by double digits in many segments after

plunging during the “Great Recession”


11

Value of Public Construction Put in Place, by Segment, June 2012 vs. June 2011*

-6.0%-5.8%

0.0%4.4%

0.2%4.0%

-2.3%-2.1%

-18.8%-22.7%

-3.7%

-27.5%

-2.9%

-12.7%

-17.8%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

To

tal

Pu

bli

cC

on

str

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Pu

bli

c S

afe

ty

Am

usem

en

t &

Rec.

Tra

nsp

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ati

on

Po

wer

Hig

hw

ay &

Str

eet

Sew

ag

e &

Waste

Dis

po

sal

Wate

r S

up

ply

Co

nserv

ati

on

&D

evelo

p.

Public Construction Activity is Up Down in Many Segments as State, City and County Budgets Remain Under Stress

Growth (%)


Public sector construction activity is down by

substantially in many segments

58

.3

57

.1

60

.4

59

.6

57

.8

55

.3

55

.1

55

.2

55

.3 56

.9 58

.2

58

.5 60

.8

61

.4

59

.7

59

.7

54

.2 55

.8

51

.4 52

.5

52

.5

51

.8

52

.2 53

.1 54

.1

52

.4 53

.4 54

.8

53

.5

49

.7

49

.8

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through July 2012

The manufacturing sector expanded for 34 consecutive months until June 2012 and added jobs. The question is whether this will continue.

Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

Manufacturing activity contracted in June for the first time in nearly 3

years, but a resumption of expansion is possible

12

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Jun 0

1

Sep 0

1

Dec 0

1

Mar

02

Jun 0

2

Sep 0

2

Dec 0

2

Mar

03

Jun 0

3

Sep 0

3

Dec 0

3

Mar

04

Jun 0

4

Sep 0

4

Dec 0

4

Mar

05

Jun 0

5

Sep 0

5

Dec 0

5

Mar

06

Jun 0

6

Sep 0

6

Dec 0

6

Mar

07

Jun 0

7

Sep 0

7

Dec 0

7

Mar

08

Jun 0

8

Sep 0

8

Dec 0

8

Mar

09

Jun 0

9

Sep 0

9

Dec 0

9

Mar

10

Jun 1

0

Sep 1

0

Dec 1

0

Mar

11

Jun 1

1

Sep 1

1

Dec 1

1

Mar

12

Jun 1

2

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 13

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 79.3% of industrial capacity in July

2012, above the June 2009 low of 68.3% and tied for the

highest level since April 2008

December 2007-June 2009 Recession

March 2001 through July 2012

13

14

Manufacturing Employment,Jan. 2010—July 2012*

11,4

58

11,4

62

11,4

70

11,5

02

11,5

36

11,5

46

11,5

66

11,5

49

11,5

51

11,5

51

11,5

60

11,5

75

11,6

27

11,6

64

11,6

90

11,7

18

11,7

26

11,7

38

11,7

68

11,7

71

11,7

68

11,7

77

11,7

80

11,8

08

11,8

60

11,8

90

11,9

32

11,9

42

11,9

55

11,9

65

11,9

90

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

2/30

/210

2

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Manufacturing employment is up by more than 500,000 or 4.6% since Jan. 2010—a

surprising source of strength in the economy


(Thousands)

16

Manufacturing Growth for Selected Sectors, 2012 vs. 2011*

11.2%

3.8%

12.1%

3.0% 3.6%5.6%

-0.1%

6.5% 5.3%5.8%9.1%

6.6%

20.9%

6.5%

-5%

0%

5%

10%

15%

20%

25%

All

Ma

nu

fact

uri

ng

Du

rab

le M

fg.

Wo

od

Pro

du

cts

Pri

ma

ryM

eta

ls

Fa

bri

cate

dM

eta

ls

Ma

chin

ery

Ele

ctri

cal

Eq

uip

.

Tra

nsp

ort

atio

nE

qu

ip.

No

n-D

ura

ble

Mfg

.

Fo

od

Pro

du

cts

Pe

tro

leu

m &

Co

al

Ch

em

ica

l

Pla

stic

s &

Ru

bb

er

Te

xtile

Pro

du

cts

Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Energy Demand and Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods has been

especially strong in 2012

*Seasonally adjusted; Date are YTD comparing data through June 2012 to the same period in 2011.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +9.1% Non-Durables: +3.0%

50

.7 52

.7 54

.1

54

.6

54

.8

53

.5

53

.7

52

.8 53

.9

54

.6 56 5

7.1 5

9.4

59

.7

56

.3

54

.4

53

.3

53

.4

53

.8

52

.6

52

.6

52

.6

52

.6

53

.0

56

.8

57

.3

56

.0

53

.5

53

.7

52

.1

52

.6

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through July 2012

Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.

Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.

Optimism among non-manufacturers was

stable in late 2011 and increased in early 2012

17

18

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

3756

,282

47,8

0610

,998

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 09 10 1112

:Q1

Business Bankruptcy Filings,1980-2012: Q1

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more

than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011

% Change Surrounding Recessions

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

18

19

Private Sector Business Starts, 1993:Q2 – 2011: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

207

199

191 19

317

2 176

169

184

175 17

918

820

018

3 187 19

119

7

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 10 11

Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But

Are Recovering Slowly* Data through Dec. 31, 2011 are the latest available as of Aug. 20, 2012; Seasonally adjusted.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 5.0% to 758,000 in 2011. 722,000 new business starts were

recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new

business starts since 1993

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 758,000*

19

20

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking)

21

Oil & Gas Extraction Employment,Jan. 2010—June 2012*


156

157

157

158 159

158

158 16

0

160 16

2

161

161 16

3 164 16

7 170 17

1 173 17

5 177 18

0 183

183 18

6 188 19

0 192

193

194 19

5

150

155

160

165

170

175

180

185

190

195

200

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

2/30

/210

2

Mar

-12

Apr

-12

May

-12

Jun-

12

Oil and gas extraction employment is up 25.1% since Jan. 2010 as the energy sector booms. Domestic

energy production is essential to any robust economic recovery in the US.

(Thousands)

22

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

22

23

Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 8.3% in

July 2012

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 15.0%

in July 2012

January 2000 through July 2012, 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 is now clearly improving

23

Jun 12

186

7921

365

127

42 15-1

09-1

465

9723

-12

-85 -58

-161

-253 -230

-257

-347

-456

-547

-734 -6

67-8

06-7

07-7

44-6

49-3

34-4

52-2

97-2

15 -186

-262

75-8

316

62

229

51 6111

714

311

2 193

128 16

711

925

726

126

410

810

2 175

5221

613

9 178 23

4 277

254

147

8511

673

172

144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Monthly Change in Private Employment

January 2008 through July 2012 (Thousands)

Private Employers Added 4.65 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 Institute

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

172,000 private sector jobs were created in July

24

0.02

30.

011

-0.0

74-0

.132

-0.2

93-0

.546

-0.7

76-1

.033

-1.3

80-1

.836

-2.3

83-3

.117

-3.7

84-4

.590

-5.2

97-6

.041

-6.6

90-7

.024

-7.4

76-7

.773

-7.9

88-8

.174

-8.4

36-8

.361

-8.4

44-8

.428

-8.3

66-8

.222

-7.9

93-7

.942

-7.8

81-7

.764

-7.6

21-7

.509

-7.3

16-7

.188

-7.0

21-6

.902 -6.3

84-6

.120

-6.0

12-5

.910

-5.7

35-5

.683

-5.4

67-5

.328

-5.1

50-4

.916

-4.6

39-4

.385

-4.2

38-4

.153

-4.0

37-3

.964

-3.7

92

-6.6

45

-10

-8

-6

-4

-2

0

2

Dec

-07

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12F

eb-1

2M

ar-1

2A

pr-1

2M

ay-

Jun-

12Ju

l-12

Mill

ion

sCumulative Change in Private Employment: Dec. 2007—July 2012

December 2007 through July 2012 (Millions)

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

Cumulative job losses peaked at 8.444 million

in December 2009

Cumulative job losses as of June 2012 totaled

3.792 million

25

All of the jobs “lost” since

President Obama took office in Jan.

2009 have been recouped

Private Employers Added 4.65 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)

0

-8

40

86

518

259

109

-70

-212 -188

-201

-221

-230

-267

-282

-295

-349

-367

-446 -4

13

-427

-454

-475

-486

-488

-483

-487

-491

-520

-529

-538

-700

-500

-300

-100

100

300

500

700

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Cumulative Change in Government Employment: Jan. 2010—July 2012

January 2010 through July 2012* (Millions)

Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

Cumulative job losses through June 2012 totaled 538,000

27

Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the

Financial Crisis, Causing Them to Reduce Staff

Government at all levels has shed more than a half

million jobs since Jan. 2010 even as private employers created 4.65 million jobs.

Temporary Census hiring distorted 2010

figures

28

Net Change in Government Employment: Jan. 2010—June 2012*

-536

-405

-72 -59

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 405,000 from Jan.

2010 through June 2012, accounting for 76% of all government job losses,

negatively impacting WC exposures for those cities and counties that insure privately

*Cumulative change from prior month; Base employment date is Dec. 2009.Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

State government employment fell by 1.4% since the end of 2009 while

Federal employment is down by 2.1%

29

Unemployment Rates by State, July 2012:Highest 25 States*

12

.0

10

.8

10

.7

9.8

9.6

9.6

9.3

9.1

9.1

9.0

8.9

8.9

8.8

8.7

8.5

8.5

8.4

8.3

8.3

8.3

8.3

8.3

8.2

7.9

7.7

7.6

0

2

4

6

8

10

12

14

NV RI CA NJ NC SC GA MS NY MI DC IL FL OR CT WA TN AL AZ CO KY US IN PA AK LA

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for July 2012, seasonally adjusted.

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

In July, 44 states reported over-the-month unemployment rate increases, 2 states and the District of Columbia had decreases, and 4 states had no change.

FL’s unemployment is above the US rate

of 8.3%

30

7.6

7.5

7.4

7.3

7.3

7.2

7.2

7.2

7.0

6.8

6.6

6.4

6.4

6.3

6.1

6.0

5.9

5.8

5.6

5.4

5.3

5.0

4.9

4.4

4.0

3.0

0

2

4

6

8

ME ID WV AR WI MO OH TX MD DE NM HI MT KS MA UT VA MN WY NH IA VT OK SD NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, July 2012: Lowest 25 States*

*Provisional figures for July 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In July, 44 states reported over-the-month unemployment rate increases, 2 states and the District of Columbia had

decreases, and 4 states had no change.

31

US Unemployment Rate Forecast

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

%

9.6

%

9.6

%

8.9

%

9.1

%

9.1

%

8.7

%

8.3

%

8.2

%

8.2

%

8.1

%

8.0

%

8.0

%

7.9

%

7.7

%

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

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

Rising unemployment eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10% in

late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/12 edition); Insurance Information Institute.

2007:Q1 to 2013:Q4F*

Unemployment forecasts have been revised slightly

upwards for 2012 and 2013. Optimistic scenarios put the

unemployment as low as 8.0% by Q4 of this year.

Jobless figures have been revised

slightly upwards for 2012/13

32

US Unemployment Rate Forecasts

8.2% 8.1%

7.9%7.7%

7.5%7.3%

8.3%8.3% 8.3%8.3%

8.0%

8.2%8.1%

8.0%

7.7%7.6%

8.0%8.1%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4

10 Most PessimisticConsensus/Midpoint10 Most Optimistic

Unemployment will remain high even under the most optimistic of scenarios, but

forecasts are being revised downwards

Sources: Blue Chip Economic Indicators (8/12); Insurance Information Institute

Steadily Decreasing Unemployment Should Benefit theWorkers Comp Exposure Base at Least Through 2013

Quarterly, 2012:Q2 to 2013:Q4

33

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2012:Q2

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,00005

:Q1

05:Q

2

05:Q

3

05:Q

4

06:Q

1

06:Q

2

06:Q

3

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2012:Q2) was $6.89 trillion, a new peak--$640B

above 2009 trough

Recent trough (2009:Q3) was $6.25 trillion, down

5.3% from prior peakGrowth rates in 2012

Q1:12 over Q4:11: 1.8%Q2 over Q1: 1.4%

Pace of payroll growth is slowing

in 2012

33

$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 10 11 12*

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

34

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2012E

*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005

7/90-3/91 3/01-11/0112/07-6/09

$Billions $Billions

WC premium volume dropped two years before

the recession began

WC net premiums written were down $14B or 29.3% to

$33.8B in 2010 after peaking at $47.8B

in 2005

+9% in 2012E

35

POSITIVE LABOR MARKET DEVELOPMENTS

Key Factors Driving Workers Compensation Exposure

35

36

Mass Layoff Announcements,Jan. 2002—June 2012*

*Seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

500

1,000

1,500

2,000

2,500

3,000

3,500

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Mass layoff announcements peaked at more than 3,000 per

month in Feb. 2009

There were 1,317 may layoffs announced in June 2012, close to pre-recession levels

37

Average Weekly Hours of All Private Workers, Mar. 2006—June 2012

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

33.5

33.6

33.7

33.8

33.9

34.0

34.1

34.2

34.3

34.4

34.5

34.6

34.7

34.8

'06 '07 '08 '09 '10 '11 '12

Hours worked totaled 34.5 per week in June,

still shy of the 34.6 hours typically worked

before the “Great Recession”

Hours worked plunged during the recession,

impacting payroll exposures

(Hours Worked)

38

Average Hourly Wage of All Private Workers, Mar. 2006—June 2012

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

$18.00

$19.00

$20.00

$21.00

$22.00

$23.00

$24.00

'06 '07 '08 '09 '10 '11 '12

The average hourly wage was $23.50 in June, up

10.6% from $21.25 when the recession began in

Dec. 2007Wage gains continued during the

recession, despite massive job losses

(Hourly Wage)

39

ADVERSE LONG-TERMLABOR MARKET DEVELOPMENTS

Key Factors Harming Workers Compensation Exposure and the

Overall Economy

39

40

Duration of Unemployment, June 2011 vs. June 2012

Source: US Bureau of Labor Statistics at http://www.bls.gov/news.release/empsit.a.htm; Insurance Information Institute.

3,068 2,976

1,874

6,263

2,810 2,826

1,811

5,370

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Less Than 5 Weeks 5-14 Weeks 15-26 Weeks 27 Weeks +

June 2011 June 2012

The plight of the long-term unemployed

remains a serious issue for the US. Skills

atrophy over time—impact on WC claim frequency/severity?

(Thousands)

-8.4% -5.0%

-3.4%

-14.3%

41

Labor Force Participation Rate,Jan. 2002—June 2012*

*Defined as the percentage of working age persons in the population who are employed or actively seeking work.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://data.bls.gov/timeseries/LNS11300000; National Bureau of Economic Research (recession dates); Insurance Information Institute.

62

63

64

65

66

67

68

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Large numbers of people are exiting (or not returning to the

labor force

Labor force participation

continues to shrink despite a falling

unemployment rate

Labor Force Participation as a % of Population

42

Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Ins. Info. Inst.

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).

There were 821,000

discouraged workers in June 2012

Thousands

“Discouraged Workers” are people who have searched for work for so long in vain

that they actually stop searching and drop out of

the labor force

Number of “Discouraged Workers,”Jan. 2002—June 2012

Large numbers of people are exiting

(or not returning to) the labor force

Workers Compensation Operating Environment

54

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

Increasingly Challenging

54

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.2

94.8

101.299.5

101.0

107.5

102.0102.0

111.1112.3

122.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

P

12

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2012F*

Commercial lines underwriting

performance in 2011 was the worst since 2002

55

Workers Compensation Combined Ratio: 1994–2012F

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4 10

3.6

10

4.4 1

10

.6 11

6.8

11

5.0

11

6.01

21

.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best (1994-2010 all carriers); NCCI for 2011 (Private carriers only); 2012 (All Carriers) Insurance Information Institute. 56

57

* Benefits paid during calendar year to injured workers and to providers of their medical care.**Costs are employer expenditures for WC benefits, associated administrative costs and insurance premiums. Includes self-insured employers and payments of benefits under large insurance programs.Sources: National Academy of Social Insurance (1980-2010); Insurance Information Institute estimates for 2011-2012.

Workers Comp Benefits* and Costs** per $100 of Covered Wages, 1980-2012F

1.781.67

1.581.50 1.49

1.64

1.791.86

1.942.04

2.18 2.16 2.13 2.17

2.05

1.83

1.66

1.491.38 1.35 1.34

1.43

1.57

1.71 1.70 1.71

1.561.45

1.33 1.291.23 1.25

1.32

0.96 0.971.04 1.05 1.09

1.171.23

1.29 1.34

1.461.57

1.65 1.65

1.531.47

1.351.26

1.17 1.13 1.121.06 1.10 1.13 1.16 1.13 1.09

0.99 0.95 0.97 1.02 0.99 1.01 1.01

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

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 11E12F

Employer Costs Benefits Paid

(Dollars per $100 of Covered Wages) WC costs to employers began to rise in 2011/12 for the first

time since 2003

58Sources: National Academy of Social Insurance (1980-2010); Insurance Information Institute estimates for 2011-2012.

Workers Comp Medical and Cash Benefits per $100 of Covered Wages, 1980-2012F

0.68 0.68 0.70 0.71 0.730.78 0.80 0.82 0.84

0.890.94

0.990.96

0.87 0.89

0.810.76

0.680.65 0.63

0.60 0.60 0.61 0.61 0.61 0.59

0.520.49 0.48

0.52 0.51 0.52 0.52

0.28 0.290.32 0.34 0.36

0.390.43

0.470.50

0.570.62

0.660.69

0.66

0.580.54

0.50 0.48 0.48 0.48 0.470.50 0.52

0.55 0.53 0.51 0.490.46

0.49 0.510.48 0.49 0.49

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

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 11E12F

Cash (Wage) Benefits Medical Benefits

(Dollars per $100 of Covered Wages) Medical benefits as a share of total benefits has increased dramatically

over the pat 20 years

Medical Cost Inflation Has Outpaced Overall Inflation For Over 50 Years

752.3

1747.1

0

300

600

900

1200

1500

1800

61 66 71 76 81 86 91 96 01 06 11

Inde

x V

alue

(196

1=10

0)

All Items

Medical Care

Source: Department of Labor (Bureau of Labor Statistics)

A claim that cost $1,000 in 1961 would cost nearly $17,500 based on

medical cost inflation trends over the past 51 years.

59

RENEWED PRICING DISCIPLINE

82

Is There Evidence of a Broad and Sustained Shift in Pricing?

82

89

Average Commercial Rate Change,All Lines, (1Q:2004–2Q: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

%4

.3%

-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

2Q

12

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

KRW Effect

Pricing as of Q2:2012 was positive marking the first full

year of gains since 2003. Increases are holding steady in

2012.

(Percent)

Q2 2011 marked the 30th consecutive quarter of price

declines

90

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2012:Q2

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

Percentage Change (%)

Trough = 2007:Q3 -13.6%

Peak = 2001:Q4 +28.5%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

KRW : No Lasting Impact

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

nearly 8 years; Q2:2012 renewals were up 4.3%

Trough = 2007:Q3 -13.6%

91

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2012:Q2

1999:Q4 = 100

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

Upward pricing pressure is smaller for large accounts, 3.7% in

Q2:2012, vs. 4.3% for small accounts and

4.9% for medium accounts

Despite 4 consecutive quarters of gains (Q2:2012 = 4.3%),

pricing today is where is was in early 2001 (pre-9/11),

suggesting additional rate need going forward, esp. in light of

record low interest rates

92

Change in Commercial Rate Renewals, by Line: 2012:Q2

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

Major Commercial Lines Renewed Uniformly Upward in Q2:2012 for Only the Fourth Time Since 2003; Property Lines & Workers

Comp Leading the Way; Cat Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

4.7%5.1%

7.2%

8.3%

0.6%

3.0%3.8% 3.9% 4.1% 4.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Su

rety

Co

mm

l Au

to

Um

bre

lla

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

EP

L

D&

O

Co

nst

ruct

ion

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

Workers Comp Rate Changes,2008:Q4 – 2012:Q2

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

-5.5%-4.6%

-4.0%-4.6%

-3.7% -3.9%

-5.4%

-3.7% -3.4%

-1.6%

2.6%

4.1%

7.5% 7.4%8.3%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

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 12:Q2

WC rate changes have been positive for 5

consecutive quarters, longer than any other

commercial line

(Percent Change)

INVESTMENTS: THE NEW REALITY

95

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

95

Property/Casualty Insurance Industry Investment Income: 2000–2012F1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.0

$46.6

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12F

Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates

1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized Q1:2012 actual figure of $11.656B.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.

($ Billions)

Investment earnings in 2011 were 10.3% below

their 2007 pre-crisis peak

100

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*

*Monthly, through June 2012. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full 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 plunged to all time

record lows

100

102

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-3.1

%-2.1

%

-1.9

%

-7.3%-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

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

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*

102

WC is performance and therefore pricing are

very sensitive to falling interest rates

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110

Documents

Economic Factors Affecting the Workers Compensation Market: An Overview and Outlook Workers Compensation Educational Conference Orlando, FL August 21,