Overview & Outlook for the P/C Insurance Industry

Drivers of Revenue, Cost and Competition

National Conference of Insurance Guaranty FundsMemphis, TNMay 4, 2011

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 ♦ bobh@iii.org ♦ www.iii.org

3

What in the World Is Going On?

Is the World Becoming a Riskier Place?

And If It Is, Should Guaranty Funds Be Concerned?

4

Uncertainty, Risk and Fear Abound Resurgent Terrorism Risk (e.g., Bin Laden Killing) Record Tornado Activity in the US Japan, New Zealand, Haiti, Chile Earthquakes Political Upheaval in the Middle East Echoes of the Financial Crisis Housing Crisis US Debt and Budget Crisis Sovereign Debt & Currency Crises Inflation Runaway Energy & Commodity Prices Era of Fiscal Austerity Reshuffling the Global Economic Deck China Becomes #2 Economy in the World Nuclear Fears Manmade Disasters (e.g., Deepwater Horizon)

Are “Black Swans” everywhere or

does it just seem that way?

5

Recent Events Illustrate the Importance of Guaranty Events

Uncertainty, Volatility and Catastrophe

6

Terrorism, P/C Insurance and the Killing of Osama bin Laden

Do We Still Need the Terrorism Risk Insurance Program?

7

Bin Laden, Justice and the Future of Terrorism, Risk and Insurance

Sources: Insurance Information Institute.

Property-WTCProperty -

Other

Bin Laden is Dead and Justice Is Served, But What Are the Implications for the P/C Insurance Industry?

8

Distribution of Insured September 11 Losses by Line ($ Billions, 2009 Dollars)

Sources: Insurance Information Institute research.

Property-WTC

Industrial

Property -Other

Property-Other,$7.419%

Business Interruption,

$13.533%

Workers Comp,$2.2

6%

Aviation Hull,$0.6

2%

Event Cancellation,$1.2

3%

Aviation Liability,$4.3

11%

Other Liability,$4.9

12%

Life,$1.23%

Property-WTC,$4.4

11%

(1) Loss total does not include NYC March 2010 settlement of up to $657.5 million to compensate about 10,000 Ground Zero workers.(2) Sum of segment totals may not equal overall total due to rounding. Adjusted to 2010 dollars using the Bureau of Labor Statistics (BLS) Inflation Calculator.

9/11 losses totaled $40.0 billion in 2010 dollars ($32.5 billion in 2001 dollars) 9/11 remains the largest

WC loss in US history ($2.2 bn), even though

9/11 property losses were surpassed by Hurricane

Katrina in 2005

9

Thwarted and Failed Terrorism Attempts Against the US in 2009 and 2010

Sources: Terrorism Risk: A Reemergent Threat, Insurance Information Institute (http://www.iii.org/white_papers/terrorism-risk-a-reemergent-threat-2011.html); Federal Bureau of Investigation.

Property-WTCProperty -

Other

9/11 remains the largest WC loss in US history ($2.2 bn), even though

9/11 property losses were surpassed by Hurricane

Katrina in 2005

There Have Been Numerous Unsuccessful Attempts by Terrorists to Attack the US Over the Past 2 Years

Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill)

Type of Coverage New York WashingtonSan

FranciscoDes

Moines

Group Life $82.0 $22.5 $21.5 $3.4General Liability 14.4 2.9 3.2 0.4Workers Comp 483.7 126.7 87.5 31.4Residential Prop. 38.7 12.7 22.6 2.6Commercial Prop. 158.3 31.5 35.5 4.1Auto 1.0 0.6 0.8 0.4TOTAL $778.1 $196.8 $171.2 $42.3

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

Workers Comp is and Remains the Most Vulnerable of All P/C Lines, Despite Killing of Bin Laden

13

Terrorism Risk Insurance and Bin Laden’s Death Bin Laden’s Killing, at Least in the Short Run, Could Actually Increase

Risk as Al Qaeda’s Sympathizers Seek to Avenge His Death US State Department: “Enhanced potential for anti-American violence.”

Longer-Run Impact is Unclear Al Qaeda has many splinter groups Current Mideast conflicts (e.g., Libya/Qaddafi attack) could increase risk

Domestic/Home Grown Terror Risk Looms Large Today than in 2001 Several potentially severe attacks have been thwarted

Challenge to Maintain Terrorism Risk Insurance Program through 2014 Will the Administration try to scale TRIPRA back under budget pressure using bin

Laden’s death as the rationale?

Will a Lack of Attacks, Death of bin Laden Influence Terrorism Risk Insurance Program Renewal Debate Ahead of 2014 Expiration? Narrowing of coverage (WC is the least likely of lines to be excluded) Increased private insurer retention relative to federal government backstop

TRIA and Its Successors: Economic Stimulus Programs that Have Cost the Government Nothing Programs promote employment, construction and investment

14

Summary of April 2011 Tornado Outbreak

2011 Will Be Among the Most Deadly and Expensive for

Tornadoes in History

15

Summary of Recent Tornado Activity

There Have Been 877 Tornadoes Through April 28 in the US

Approximately 450 People Have Died

The April 27 Tornado Outbreak Killed at Least 342 People Now the 2nd deadliest outbreak in US history (747 killed in march 1925 event)

States impacted: AR, TN, LA, MS, GA and especially AL

Insured Losses Estimated at $2 Bill to $5 Bill (Eqecat)

Economic Losses Likely in the $4 Bill to $10 Bill Range

P/C Insurers (and their Reinsurers) Will Settle Tens of Thousands of Home, Business and Auto Claims

P/C Insurance Industry is Very Strong and Will Encounter No Difficulties in Paying these Claims

16

1,13

3

1,13

2 1,29

7

1,17

3

1,08

2 1,23

4

1,17

3

1,14

8

1,42

4

1,34

5

1,07

1 1,21

6

941

1,37

6

1,26

4

1,10

3

1,09

8

1,69

2

1,15

6 1,28

0

1,819

877

440

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 11P

Num

ber o

f Tor

nado

es

0

50

100

150

200

250

300

350

400

450

500

Num

ber of Deaths

Number of Tornadoes

Number of Deaths

*2011 is preliminary data through April 28; Death count is III estimate based on official sources as of April 30. Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.

Number of Tornadoes and Related Deaths, 1990 – 2011*

Tornadoes have already claimed more than 400 lives

There were already 877 tornadoes in the

US by April 28

U.S. Tornado Count, 2010

Source: NOAA 17

There were 1483 tornadoes in the US in 2010, slightly

above average

2011 is shaping to be a deadlier

version of 2008

20

Summary of Japan Earthquake

The March 11 Quake is Just the Most Recent of Several Large

Catastrophe Losses

21

Location of March 11, 2011 Earthquake Near Sendai, Honshu, Japan

Source: US Geological Service; Insurance Information Institute.

Magnitude 9.0 earthquake struck Japan at 2:46PM local time (2:46AM Eastern) off northeast coast of Honshu, 80 miles east of Sendai

Quake is among the 5 strongest in recorded history and the strongest in the 140 years for which records have been kept in Japan

12,000+ fatalities

Economic loss: $100 - $300 bn

Insured losses up to $45 bn

Fukushima Nuclear Plant threat level raised to Category 7 on April 11 (highest, same as Chernobyl)

Significant tsunami damage was recorded in Japan; relatively minor damage on the U.S. West Coast

March 11 Earthquake Factsas of 3/24/2011

LOCATION130 km (80 miles) E of Sendai, Honshu, Japan178 km (110 miles) E of Yamagata, Honshu, Japan178 km (110 miles) ENE of Fukushima, Honshu, Japan373 km (231 miles) NE of TOKYO, Japan

Insured Japan Earthquake Loss Estimates*

$- $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

Towers Watson

AIR Worldwide

RMS

Eqecat

$21 - $34 bn

$20 - $45 bn

$12 - $25 bn

$25 - $35 bn

22

*As of April 21, 2011. Towers Watson estimate includes $3.0 (low) to $4.9 billion (high) in life insurance losses. RMS estimate includes insured life/health losses of $3 to $8 billion.Sources: AIR Worldwide, Eqecat, RMS, Towers Perrin; Insurance Information Institute.

(Insured Losses, $ Billions)

Economic losses are likely to total in the $200-$300 billion

range, meaning only a fraction of the loss is insured

23

Top 20 Nonlife Insurance Companies in Japan by DPW, 2008

Direct premiums written, 2008

Rank Companies JPY (millions)

U.S. ($ millions)

Marketshare

Cumulative Market Share

1 Tokio & Marine Nichido $2,032,131.2 $19,660.9 24.0% 24.0%

2 Sompo Japan 1,504,262.7 14,553.8 17.8 41.8%

3 Mitsui Sumitomo 1,455,161.8 14,078.7 17.2 59.0%

4 Aioi 897,182.6 8,680.3 10.6 69.6%

5 Nipponkoa 728,262.9 7,046.0 8.6 78.2%

6 Nisay Dowa 361,530.7 3,497.8 4.3 82.5%

7 Fuji 329,345.7 3,186.4 3.9 86.4%

8 AIU 253,522.8 2,452.8 3.0 89.4%

9 Kyoei 199,393.1 1,929.1 2.4 91.8%

10 Nisshin 149,735.8 1,448.7 1.8 93.6%

11 American Home 82,889.8 802.0 1.0 94.6%

12 Asahi 73,600.1 712.1 0.9 95.5%

13 Sony 60,868.3 588.9 0.7 96.2%

14 ACE 54,876.2 530.9 0.7 96.9%

15 Zurich 45,471.3 439.9 0.5 97.4%

16 SECOM 44,245.0 428.1 0.5 97.9%

17 Sumi Sei 33,594.0 325.0 0.4 98.3%

18 AXA 30,418.9 294.3 0.4 98.7%

19 Mitsui Direct 29,471.9 285.1 0.4 99.1%

20 Daido 15,690.4 151.8 0.2 99.3%

Source: © AXCO 2011.

24

Recent Major Catastrophe Losses

(Insured Losses, $US Billions)

Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.

$30.0

$10.0$8.0

$5.0$2.0$0.5

$0

$5

$10

$15

$20

$25

$30

$35

Cyclone Yasi(Australia) Feb

2011

Australia Floods(Dec - Feb 2011)

New ZealandQuake (Sep 2010)

Chile Earthquake(Feb 2010)

New ZealandQuake (Feb 2011)

Japan Earthquake(Mar 2011)

Insured Losses from Recent Major Catastrophe Events Exceed $55 Billion, an Estimated $53 Billion of that from Earthquakes

The March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current

leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars)

25

Potential Impacts of Japan Quake & Other Major CATs on

P/C (Re)Insurance Markets

Impacts Could Be Felt Well Beyond Japan

26

Nonlife (P/C) Insurance Market Impacts of Japan Earthquake No Direct Impact for US Domestic Primary Insurers Primary Insurance: Domestic Japanese Insurers Take Big Losses Few US/Foreign Insurers Had Direct Exposure to Japanese P/C Market

Low single-digit market share for a small number of companies Not a capital event for any non-Japanese primary insurer

Significant Absorption of Loss by Japanese Government Residential earthquake damage Nuclear-related property and liability damage

Significant Impacts for Global Reinsurers Property-Catastrophe covers on Commercial Lines Business Interruption/Contingent Business Interruption

Currently an Earnings Event for Global Reinsurers Not a capital event: Global reinsurance markets entered 2011 with record capital

Cost of Property/Cat Reinsurance Rising in Japan, New Zealand, Australia Up for all; Magnitude of increase is sensitive to size of loss

Reinsurance Coverage Remains Available in Affected Regions Marginal Impact on Cost of US Property-Cat Reinsurance

Market remains well capitalized and competitive Elevated global cat activity could halt/hike price declines for property/cat reinsurance

Percentage of California Homeowners with Earthquake Insurance, 1994-2010*

32.9% 33.2%

19.5%17.4%

14.6% 13.3% 13.8%12.0% 12.0%

15.8%15.7%16.8%

0%

5%

10%

15%

20%

25%

30%

35%

94 96 97 98 99 00 01 02 03 04 06** 10**

*Includes CEA policies beginning in 1996. **2006/10 estimates from Insurance Information Network of CA.Source: California Department of Insurance; Insurance Information Institute.

The vast majority of California homeowners forego earthquake

coverage and play Russian Roulette with their most valuable asset

28

% of Residences in MO Quake-Prone Areas with Earthquake Coverage, 2009 vs. 2002

Sources: Missouri Department of Insurance news release, Feb. 11, 2011; Insurance Information Institute.

69%

63%

36%

63%

37% 45

%

43%

32%

55%

49%

48%

73%

54%

56%

51%

51%

0%

10%

20%

30%

40%

50%

60%

70%

80%

St. LouisCity

St. LouisCounty

Dunklin Mississippi NewMadrid

Pemiscot Scott Stoddard

2002 2009

Residential Take-Up Rates in Missouri Quake-Prone Counties Have Fallen Significantly in Recent Years, but Compare Favorably to California (12%)

Between 32% and 63% of MO homeowners buy quake coverage in

vulnerable areas compared to 12% of CA homeowners and about 50% in Japan.

29

Estimated Insured Losses for the Top 10 Historical Earthquakes Based on Current Exposures (1) ($ Billion)

(1) Modeled loss to property, contents, and business interruption and additional living expenses for residential, mobile home, commercial and auto exposures as of December 31, 2008. Losses include demand surge and fire following earthquake. Policy conditions and earthquake insurance take up rates are based on estimates by state insurance departments and client claims data.

Source: AIR Worldwide Corporation.

Rank Date Location Magnitude Insured loss(current exposures)

1 Feb. 7, 1812 New Madrid, MO 7.7 $100

2 Apr. 18, 1906 San Francisco, CA 7.8 96

3 Aug. 31, 1886 Charleston, SC 7.3 37

4 Jun. 1, 1838 San Francisco, CA 7.4 27

5 Jan. 17, 1994 Northridge, CA 6.7 21

6 Oct. 21, 1868 Hayward, CA 7.0 21

7 Jan. 9, 1857 Fort Tejon, CA 7.9 8

8 Oct. 17, 1989 Loma Prieta, CA 6.3 6

9 Mar. 10, 1933 Long Beach, CA 6.4 5

10 Jul. 1, 1911 Calaveras, CA 6.4 4

30

Reinsurance Market Overview

Reinsurers Will Bear a Significant Share of Recent Major Catastrophes Losses

31

Change in Reinsurer Capital, 2007-2010:Q3

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1998 1999 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011

Bill

ion

s

Worldwide Direct Insured Losses Reinsured Losses

Reinsurers’ share of major market losses was

exceptionally high in 2010 and early 2011

Source: Holborn; RAA.* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.

Significant Market Losses, 1985-2011*

41

Reasons for Optimism, Causes for Concern in the P/C

Insurance Industry

The Outlook for the Economy Has Brightened, But the Outlook

for P/C Insurance Is Mixed

42

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry Economic Recovery in US is Self-Sustaining and Strengthening

No Double Dip or Second Recession Economy is more resilient than most pundits presume

Consumer Confidence is Gradually Improving Consumer Spending is Recovering Gradually Consumer and Business Lending Are Expanding Housing Market Remains Weak, but Some Improvement Expected in 2011 Inflation Remains Under Control

Runaway inflation is highly unlikely; Fed has things under control Deflation—threat has disappeared

Private Sector Hiring is Consistently Positive for 14 Months Acceleration in hiring later in 2011 compared to 2010 No significant secondary spike in unemployment

Japan Threat to Global Economy Overstated Sovereign Debt, Muni Bond “Crises” Overblown Current Middle East Turmoil Poses Only Moderate Risk to US Economy Interest Rates Are Rising but Remain Low by Historical Standards Stock and Bond Markets More Stable, Less Volatile Political Environment Is More Hospitable to Business Interests

43

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry Era of Mass P/C Insurance Exposure Destruction Has Ended

Personal and commercial exposure growth is virtually certain in 2011 But restoration of destroyed exposure will take 3-5 years in US

Exposure Growth Returned in in 2nd Half 2010, Will Accelerate in 2011 P/C Industry Saw Growth in 2010 (+0.8%) for the First Time Since 2006 Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures

Wage growth is also positive and could modestly accelerate

Increase in Demand for Commercial Insurance Is in its Earliest Stages and Will Accelerate in 2011 Includes workers comp, commercial auto, marine, many liability coverages, D&O Laggards: Property, inland marine, aviation Personal Lines: Auto leads, homeowners lags

Investment Environment Is/Remains Much More Favorable Return of realized capital gains as a profit driver Interest rates are low but are risingBoost to investment income

Agent Commissions Should Begin to Rise in 2011

Demand, Capital Management Strategies Will Temper Overcapitalization

44

P/C Insurance Industry Financial Overview

Profit Recovery ContinuesEarly Stage Growth Begins

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

$14,

178

$5,8

40

$19,

316

$10,

870 $20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$62,

496

$3,0

43

$34,

670

$28,

672

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5%

P-C Industry 2010 profits were$34.7B vs.$28.7B in 2009, due mainly to $5.7B in realized capital

gains vs. -$7.9B in previous realized capital losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE

* 2009 and 2010 figures are return on average statutory surplus. 2008, 2009 and 2010 figures exclude mortgage and financial guaranty insurers

Source: Insurance Information Institute from A.M. Best and ISO data.

97.5100.6 100.1 100.7

92.6

99.3100.8101.0

7.5%7.4%

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*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 ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

PRICING TRENDS

50

Winds of Change or Moving Sideways?

51

-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 10E

11F

Soft Market Persisted in 2010 but Growth Returned: More 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 up 0.9% in 2010 with forecast growth of 1.4% in 2011

52

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

Sources: ISO, Insurance Information Institute.

Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)

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.

3%

-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

The long-awaited uptick:

mainly personal lines

53

Net Written Premium Growth by Segment: 2008-2011F

-0.1%

-9.4%

2.8%

-2.0%

2.5%0.3%

-3.1%

-0.1%

-12%-10%

-8%-6%-4%-2%0%2%4%

Personal Lines Commercial Lines

2008 2009E 2010P 2011F

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession

weigh on commercial lines.

Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted

again in 2010 and but will stabilize in 2011

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

UNDERWRITING

55

Cyclicality is Driven Primarily by the Industry’s Underwriting

Cycle, Not the Economy

56

P/C Insurance Industry Combined Ratio, 2001–2010*

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

95.7

99.3100.8101.0

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

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

57

Calendar Year Combined Ratios by Segment: 2008-2011F

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

102.4

98.9100

106

99.5

108

103.8104.5

9092949698

100102104106108110

Personal Lines Commercial Lines

2008 2009 2010P 2011F

Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

performance related to the prolonged commercial soft market

Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate

60

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$3092 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

10E

11E

Prio

r Yr.

Res

erve

Rel

ease

($B

)

-6

-4

-2

0

2

4

6

8 Impact on C

ombined R

atio (Points)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio

P/C Reserve Development, 1992–2011E

Reserve Releases Are Remained Strong in 2010 But Should Begin to Taper Off in 2011

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

Prior year reserve releases totaled

$8.8 billion in the first half of 2010, up from $7.1 billion in

the first half of 2009

INVESTMENTS: THE NEW REALITY

61

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–20101

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$52.9$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

Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to

Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2010 were the best

since 2007

Financial Strength & Underwriting

67

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

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20108

1512

711 9

349

13 1219

916 14 13

3649

3134

50 4855

60 5841

2916

1231

18 1949 50

4735

1814 15 16 18

11

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

Source: A.M. Best Special Report “1969-2010 Impairment Review,” June 21, 2010; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

8 of the 18 in 2009 were small Florida carriers. Total also

includes a few title insurers.

69

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2010

90

95

100

105

110

115

12069 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

Com

bine

d R

atio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Impairm

ent Rate

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2010 impairment rate was 0.35%, down from 0.65% in 2009 and near the record low of 0.17% in 2007; Rate is still less than

one-half the 0.81% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007

70

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

71

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010

2.0%4.4%

4.8%

6.5%

6.9%

7.7%

8.1%

10.9%

22.2%

26.6%

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

Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade

Workers Comp

Financial Guaranty

Pvt. Passenger Auto

Homeowners

Commercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

SuretyTitle

CAPITAL MANAGEMENT & LEVERAGE

83

Excess Capital is a Major Obstacle to a Market Turn;

Capital Management Decisions Will Impact Market Direction

85

Policyholder Surplus, 2006:Q4–2010:Q4

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$556.9

$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 10:Q3 10:Q4

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%)09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)

Surplus set a new record in 2010:Q4*

*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 $0.76 of

NPW—the strongest claims-paying status in its history.

90

2.1

1.9

2.7

2.5

2.3

1.8

1.7

1.7

1.9

1.9

1.9

1.9

1.7

1.6

1.6

1.4

1.4

1.3

1.3

1.1

1.1

0.9

1.13

0.94

0.86

0.84

1.29

1.17

1.07

0.99

0.840.

91

0.760.

950.

82

1.6

2.0

2.52.5

1.8

2.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 0 02 04 06 08 10*

The Premium-to-Surplus Ratio in 2010 Implies that P/C Insurers Held $1 in Surplus Against Each $0.76 Written in Premiums. In 1974, Each $1 of

Surplus Backed $2.70 in Premium.*2010 data are as of 12/31/10.Sources: Insurance Information Institute calculations from A.M. Best data.

Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2010*

The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.76:1 in 2010. It has decreased as PHS grows

more quickly than NPW, with the effect of holding down profitability.

Record High P-S Ratio was 2.7:1

in 1974

Record Low P-S Ratio was 2.7:1

in 2010*

Inflation

100

Is it a Threat to Claim Cost Severities

101

Annual Inflation Rates, (CPI-U, %),1990–2014F

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

2.72.1 2.1 2.2

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 4/11 (forecasts).

The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns

Annual Inflation Rates (%)

Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the

commodity bubble reduced inflationary pressures in 2009/10

Higher energy, commodity and food prices are pushing up inflation in 2011, but not longer turn

inflationary expectations.

P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

1.6%1.0%

3.4%

8.8%

6.1%

3.3%

4.3%

3.1%

0%

3%

6%

9%

Overall CPI "Core" CPI Medical CPI InpatientHospitalServices

OutpatientHospitalServices

Physicians'Services

PrescriptionDrugs

Medical CareCommodities

Price Changes in 2010

Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least

102

Excludes Food and

Energy

Financial Services Reform

103

Insurers Not as Impacted as Banks, But Dodd-Frank

Implementation Has Been a Concern for Insurers

104

Financial Services Reform:What does it mean for insurers?

Systemic Risk and Resolution Authority Creates the Financial Stability Oversight Council and the Office of Financial Research

Regulator representative is MO Insurance Commissioner Huff

No industry representative has been appointed yet

Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurers

Concern some insurers may be labeled as systemically risky based on size alone

Federal Insurance Office (FIO) Establishes the FIO (while maintaining state regulation of insurance) within the

Department of Treasury, headed by a Director appointed by the Secretary of Treasury

FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis

IL Insurance Director Michael McGraith will become first FIO Director

CONCERN: FIO morphs into quasi/shadow or actual regulator

The Dodd Frank Wall Street Reform and Consumer Protection Act

Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WVVA

NC

LATX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI C

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SD WI

INOH

MT

CA

NV

UT

WY

CO

AK

= A= B= C= D= F= NG

Source: Heartland Institute, May 2010

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+D

NGNG

D F

F

2010 Property and Casualty InsuranceReport Card

Not Graded: District of ColumbiaMississippiLouisiana

Economic Issues for the Next 3-5 Years

106

P/C Insurance Industry Growth in the Wake of the “Great Recession”

107

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/11; 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% 2.6% 3.1%

1.8% 3.

2%3.

3%3.

4%3.

1%3.

2%3.

2%3.

3%4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q07

:4Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q10

:3Q

10:4

Q

11:1

Q

11:2

Q

11:3

Q

11:4

Q

12:1

Q

12:2

Q

12:3

Q

12:4

Q

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

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

2011 got off to a sluggish start, but growth is expected

to accelerate in the remainder of the year. This is a major

positive for insurance demand and exposure growth.

110

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

44.8

25.4

19.8

17.3

16.6

14.2

13.9

12.4

12.3

11.9

9.1

8.1

8.1

7.1

6.8

5.4

5.2

4.7

3.8

3.7

3.1

3.0

1.5

1.2

1.1

05

1015202530354045

ND SD LA WY

OK

WV

KS IA TX MT

NE

DE

MS

NM SC DC UT AR

NC ID WA AL WI

AK

TN

Pece

nt c

hang

e (%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 StatesNorth Dakota is the growth

juggernaut of the P/C insurance industry—too bad nobody lives there…

111

0.7

0.6

0.1

-0.1

-0.3

-0.5

-0.8

-1.4

-1.6

-1.7

-2.5

-2.8

-2.9

-3.4

-3.6

-4.1

-4.5

-4.7

-4.8

-5.7

-5.8

-8

-8.2

-8.3

-13.

5

-14.

2

-15.

5

-20

-15

-10

-5

0

5M

D

MO KY IN NY

GA

MN VA US PA OR FL IL CT VT OH RI

CO NJ HI

ME

NH

MA AZ

NV MI

CA

Pece

nt c

hang

e (%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

States with the poorest performing economies also produced the most negative net change in premiums of

the past 5 years

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

US Direct Premiums Written declined by 1.6% between 2005

and 2010

118

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine, Trucking)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

Many industries are

poised for growth, but

many insurers do not write in

these economic segments

129

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

130

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$61.

9

$9.2

$6.7

$27.

1

$10.

6

$13.

6

$1.6

$100

.0

$7.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??

US Insured Catastrophe Losses

*First quarter 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.

2010 CAT Losses Were Close to “Average” Figures Do Not Include an Estimate of Deepwater Horizon Loss

$100 Billion CAT Year is Coming Eventually

2010 CAT Losses Were

About Average

($ Billions)

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89BTornado losses

could total $2B+ in

2011

132

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2010E

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute estimate for 2010.

0.4 1.

20.

4 0.8 1.

30.

30.

4 0.7 1.

51.

00.

40.

4 0.7

1.8

1.1

0.6 1.

4 2.0

1.3 2.

00.

50.

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 3.

33.6

0.9

0.1

1.1

1.1

0.8

0123456789

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

E

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Avg. CAT Loss Component of theCombined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52

Combined Ratio Points

Num

ber

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2010)

Source: MR NatCatSERVICE 133

There were a record 247 natural disaster events in

the US in 2010

U.S. Thunderstorm Loss Trends, 1980 – 2010 (Annual Totals)

Source: Property Claims Service, MR NatCatSERVICE 134

Thunderstorm losses in 2010 totaled $9.5 billion, the

3rd highest ever

Average thunderstorm losses have now quintupled since

the early 1980s

Hurricanes get all the headlines, but thunderstorms are

consistent producers of large scale loss

Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals)

135

Insured winter storm losses in 2010 are one of the top five in US history, totaling

$2.6 billion in 2010

136

Inflation Adjusted US Catastrophe Losses by Cause of Loss, 1990–20091

0.5%

2.4%3.3%5.2%

7.0%

7.4%

29.0%

45.2%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $152.4

Fires (4), $8.0

Tornadoes (2), $97.8

Winter Storms, $25.0

Terrorism, $23.6

Geological Events, $17.6

Wind/Hail/Flood (3), $11.1

Other (5), $0.5

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

137

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2010*($ Billions)

* Adjusted to 2010 dollars.Source: PCS division of ISO; Insurance Information Institute.

Louisiana Accounted for 10% of All US Insured CAT Losses from 1980-2010: $36.7B out of $237.5B

$237.52 , 62%

$62.62 , 17%

$42.30 , 11% $36.68 ,

10%

Florida

Texas

Louisiana

Rest of US

138

Top 12 Most Costly Disastersin US History(Insured Losses, 2009, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments.

$11.3 $12.6$17.2

$22.2 $22.7

$45.1

$8.5$8.1$6.6$6.2$5.2$4.2

$0$5

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

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

Andrew(1992)

9/11Attacks(2001)

Katrina(2005)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 of the Top 12 Disasters Affected FL

Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US

and World History

139

Total Value of Insured Coastal Exposure

(2007, $ Billions)

Source: AIR Worldwide

$224.4$191.9

$158.8$146.9$132.8

$92.5$85.6$60.6$55.7$51.8$54.1

$14.9

$479.9$635.5

$772.8$895.1

$2,378.9$2,458.6

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B

in insured coastal exposure

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

141

Outlook for the 2011 Atlantic Hurricane Season

Above Average Activity, More Landfalls Expected

Outlook for 2011 Hurricane Season: 75% More Active Than Average

Average* 2005(Katrina Year)

2011F

Named Storms 9.6 28 16Named Storm Days 49.1 115.5 80Hurricanes 5.9 14 9Hurricane Days 24.5 47.5 35Intense Hurricanes 2.3 7 5

Intense Hurricane Days 5.0 7 10

Accumulated Cyclone Energy 96.1 NA 160

Net Tropical Cyclone Activity 100% 275% 175%

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, April 6, 2011.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2011

Average* 2011F

Entire US Coast 52% 72%

US East Coast Including Florida Peninsula

31% 48%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 47%

ALSO…Above-Average Major HurricaneLandfall Risk in Caribbean for 2011 (61% vs. 42%)

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, April 6, 2011.

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online: