State Insurance Trade Association Annual Conference Cincinnati, OH October 6, 2009

The Financial Crisis and the Future of the P/C

Insurance IndustryChallenges & Opportunities Amid

the Economic Storm

State Insurance Trade Association Annual ConferenceCincinnati, OH

October 6, 2009

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

Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org

2

Presentation Outline

• The Economic Storm: Financial Crisis & Recession• Exposure & Growth: Regional Analysis

• Economic Trends: Commercial, Personal Implications• Key Threats and Issues Facing P/C Insurers Through 2015• Regulatory Reform• Financial Strength & Ratings

• Key Differences Between Insurer and Bank Performance During Crisis

• Insurance Industry Financial Overview & Outlook• Profitability

• Premium Growth

• Underwriting Performance: Commercial & Personal Lines

• Financial Market Impacts

• Merger & Acquisition Activity

• Capital & Capacity• Catastrophe Loss Trends

THE ECONOMIC STORM

What the Financial Crisis and Recession Mean for the Industry’s

Exposure Base, Growth and Investments

4

3.7

%

0.8

% 1.6

% 2.5

% 3.6

%

3.1

%

2.9

%

0.1

%

4.8

%

4.8

%

-0.7

%

1.5

%

-2.7

%

3.0

%

2.4

%

2.5

%

2.7

%

2.7

%

2.9

%

-0.7

%

-6.4%

-5.4%

-0.2%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2

000

2

001

2

002

2

003

2

004

2

005

2

006

07:1

Q

07:2

Q

07:3

Q

07:4

Q

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

Q

10:3

Q

10:4

Q

Real GDP Growth*

*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 9/09; Insurance Information Institute.

Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but recovery is in sight

The Q1:2009 decline was the steepest since the

Q1:1982 drop of 6.4%

Personal and commercial lines

exposure base have been hit

hard and will be slow to come

back

5

State Economic Growth Varied Tremendously in 2008

Eastern US growing more slowly than Plains,

Mountains

6

Labor Underutilization: Broader than Just

Unemployment

11.2%

16.4% 16.5% 16.3%17.0%16.8%

10%

11%

12%

13%

14%

15%

16%

17%

18%

Sep-08 May-09 Jun-09 Jul-09 Aug-09 Sep-09

Marginally attached and underemployed persons account for 17% of the labor

force in Sept. 2009. Unemployment rate alone was 9.8%. Underutilization shows

a broader impact on WC and other commercial exposures.

NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are availableFor a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-marketrelated reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

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

Percent % of Labor Force

7

Fastest Growing States in 2008: Plains, Mountain States Lead

7.3%

4.4%

3.5%2.9%

2.0%2.1%2.5%

2.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

ND WY SD CO OK WV IA TX, MN,NM, WA

Natural resource and agricultural states have done

better than most others recently, helping insurance

exposure in those areas

Source: US Bureau of Economic Analysis; Insurance Information Institute.

PercentReal State GDP Growth

8

Slowest Growing States in 2008: Diversity of States Suffering

-0.1%

-0.4%-0.6%-0.6%

-1.5%-1.6%-1.6%

-1.7%

-2.0%

-0.9%

-0.6%-0.6%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%KY CT AZ GA IN NV RI MI DE FL OH AK

States in the North, South, East and West all represented among

hardest hit but for differing reasons

Source: US Bureau of Economic Analysis; Insurance Information Institute.

PercentReal State GDP Growth

9

Length of U.S. Business Cycles, 1929-Present*

43

138 11 10 8 10 11

166

168 8

19

50

80

3745

39

24

106

36

58

12

92

120

73

0

10

20

30

40

50

60

70

80

90

100

110

120

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

Contraction Expansion Following

* Through June 2009 (likely the “official end” of recession) **Post-WW II period through end of most recent expansion.

Sources: National Bureau of Economic Research; Insurance Information Institute.

Duration (Months)

Month Recession Started

Average Duration** Recession = 10.4 MonthsExpansion = 60.5 Months

Length of expansions

greatly exceeds

contractions

10

Total Industrial Production,(2007:Q1 to 2010:Q4F)

1.5%3.2% 3.6%

0.3% 0.2%

-4.6%

-9.0%

-13.0%

-19.1%

-11.4%

4.1%3.8%4.1%4.1%2.1%

4.4%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/09); Insurance Info. Inst.

Industrial production began

to contracted sharply in late

2008 and plunged in Q1 2009

End of recession in late 2009, Obama stimulus program are expected to benefit industrial production and

therefore insurance exposure both directly and indirectly

Figures for 2010 revised upwards to

reflect expected impact of Obama stimulus program

and a gradual economic recovery

11

5.2%

-0.9

%-7

.4%

-6.5

%-1

.5%

1.8%

4.3%

18.6

%20

.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%

13.7

%7.

7%1.

2%-2

.9% -0

.5%

-3.8

%-4

.4%

-3.1

%

-10%

-5%

0%

5%

10%

15%

20%

25%7

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

9

Rea

l N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Rea

l G

DP

Gro

wth

Real NWP Growth Real GDP

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

P/C insurance industry’s growth is influenced modestly by growth

in the overall economy

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 9/09; Insurance Information Inst.

$1,604

$218

$890

$0

$250

$500

$750

$1,000

$1,250

$1,500

$1,750

Banks Insurers Others

US Financial Institutions FacingHuge Losses from Financial Crisis*

*Estimate of financial sector writedowns, 2007-2010, as of April 2009. Includes loans and securities.Source: IMF Global Financial Stability Report, April 2009.

$ BillionsThe IMF estimates total US financial sector writedowns from soured assets will reach

$2.712 trillion, up 93% from $1.405 trillion from its Sept. 2008 estimate. Insurer losses

account for just 8% of the total.

$218B or 8% of estimated total (bank+insurer) losses will be

sustained by insurers

12

Labor Market Trends

Fast & Furious: Massive Job Losses Sap the Economy & Personal &

Commercial Lines Exposure

14

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

January 2000 through September 2009*

Unemployment will likely peak near 10 % during this cycle, impacting payroll

sensitive p/c and l/h exposures

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

Sept. 2009 unemployment was 9.8%, up 0.3% from July but still near its

highest level since August 1983

Unemployment Rate:On the Rise

Average unemployment rate 2000-07 was 5.0%

Previous Peak: 6.3% in June 2003

Trough: 4.4% in March 2007

Sep

-09

15

U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*

4.5%

4.5% 4.6% 4.

8% 4.9%

5.4%

6.1%

6.9%

8.1%

9.3% 9.

6% 9.9% 10

.0%

9.9%

9.7%

9.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

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

* Blue bars are actual; Yellow bars are forecasts

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/09); Insurance Info. Inst.

Rising unemployment is eroding payrolls and

workers comp’s exposure base.

Unemployment is expected to peak above

10% in early 2010.

16

Monthly Change Employment*(Thousands)

-72-144-122

-160-137-161-128

-175

-321-380

-597

-681-741

-681-652

-519

-303

-463

-304

-201-263

-800

-700

-600

-500

-400

-300

-200

-100

0

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Job losses since the recession began in Dec. 2007 total 7.2 mill; 15.1 million people are now defined as unemployed.

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

Monthly losses in Dec. – May were the largest in the post-WW II period

but pace of loss is diminishing

January 2008 through September 2009

17

% Change in Employment by Industry: All But Government/Health Down

-14.6%

-12.2%

-4.1%-5.1%

2.2%

-4.2%

2.0%

-7.1%

-2.4%

-16%-14%-12%-10%

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

The US economy lost 5.24 million jobs between July 2008 and July 2009

Source: US Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.t14.htm; Ins. Info. Institute.

PercentChange

Change in July 2009 vs. July 2008

Govt. and health are two

of the few areas of employment

growth

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45Wage & SalaryDisbursementsWC NPW

*Average Wage and Salary data as of 7/1/2009.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

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

Net Written Premiums

7/90-3/91

Shaded areas indicate recessions

3/01-11/01

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

12/07-?

Weakening wage and salary growth is

expected to cause a deceleration in workers comp

exposure growth

Unemployment Rates by State, August 2009: Highest 25 States*

10.7

9.9

9.710

.0

10.2

10.4

9.2

9.1

9.1

8.99.

5

9.0

9.09.

5

11.112

.2

10.8

10.8

10.8

11.1

11.5

12.7

12.8

12.2

15.2

0

2

4

6

8

10

12

14

16

MI NV RI CA OR SC DC KY OH NC TN FL AL GA IL IN NJ MS MO WA AZ MA NY WV ID

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for August 2009, seasonally adjusted.

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

Unemployment in DC, OH, NC, TN, IL and IN was above the US average of 9.7%

in August 2009

6.8

6.8

6.6

6.6

6.56.

97.2

7.2

4.9

5.0

6.0

7.1

7.1

4.3

6.8

8.0

8.1

7.37.57.

88.0

8.18.

6

8.6

8.38.

8

0

2

4

6

8

10

WI PA ME AK DE CT MN TX LA NM CO HI MD AR KS NH IA OK VT MT WY VA UT NE SD ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, August 2009: Lowest 25 States*

*Provisional figures for August 2009, seasonally adjusted.

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

North Dakota had the lowest unemployment rate in the US in August 2009 at 4.4%

vs. 9.7% for the US

Inflation Trends Pressures Claim Cost

Severities via Medical and Tort Channels

22

Annual Inflation Rates(CPI-U, %), 1990-2010F

4.9 5.1

3.0 3.2

2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

(0.5)

1.8

2.82.92.4

(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 09F10F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Sept. 10, 2009 (forecasts).

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

recession and the collapse of the commodity bubble have produced temporary deflation.

There is so much slack in the US economy that inflation should not be a concern through 2010

-$2,000

-$1,500

-$1,000

-$500

$0

$5001

96

9

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

19

Fed

eral

Def

icit

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Def

icit

as

% o

f G

DP

Federal Deficit ($ Bill) % GDP

US Budget Deficit, 1969-2019F

Deficit expected to hit record $1.8 trillion in 2009 or 13% or GDP, a post-WW II high

Sources: Congressional Budget Office analysis of President’s budget, March 2009; Insurance Information Institute.

Concerns that deficit spending will drive up inflation. This would

harmful to insurance claim severity.

24

Top Concerns/Risks for Insurers if Inflation is Reignited

CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary. What are the potential impacts for insurers? What can/should insurers do to protect themselves from the risks of inflation?

KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities

Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy

Rates inadequate due to low trend assumptions arising from use of historical data • Reserve Inadequacy

Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions

Retentions, deductibles burned through more quickly• Reinsurance Penetration/Exhaustion

Higher costsrisks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly

Source: Ins. Info. Inst.

GREEN SHOOTS

Is the Recession Nearing an End?

34

Hopeful Signs That the EconomyWill Begin to Recover Soon

• Recession Appears to be Bottoming Out, Freefall Has Ended• Pace of GDP shrinkage is beginning to diminish

• Pace of job losses is slowing

• Major stock market indices well off record lows, anticipating recovery

• Some signs of retail sales stabilization are evident

• Financial Sector is Stabilizing• Banks are reporting quarterly profits

• Many banks expanding lending to credit worthy people & businesses

• Housing Sector Likely to Find Bottom Soon• Home are much more affordable (attracting buyers)

• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)

• Freefall in housing starts and existing home sales is ending in many areas

• Inflation & Energy Prices Are Under Control

• Consumer & Business Debt Loads Are Shrinking

Source: Ins. Info. Inst.

35

11 Industries for the Next 10 Years: Insurance Solutions Needed

GovernmentEducation

Health CareEnergy (Traditional)Alternative Energy

AgricultureNatural Resources

EnvironmentalTechnology

Light ManufacturingExport Oriented Industries

Crisis-Driven Exposure

ImplicationsHome, Auto, Exposure Growth Slows as Sales

Nosedive

37

New Private Housing Starts,1990-2010F (Millions of Units)

2.07

1.80

1.36

0.90

0.58

0.80

1.48

1.351.

46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.60 1.

71

1.85 1.

960.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1

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

Exposure growth due to home construction forecast for HO insurers is dim for 2009

with some improvement in 2010.

Impacts also for comml. insurers with construction risk exposure

New home starts plunged 34%

from 2005-2007; Drop through 2009 is 72% (est.)—a net

annual decline of 1.49 million

units, lowest since record

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.

Source: US Department of Commerce; Blue Chip Economic Indicators (9/09); Insurance Information Inst.

38

16.916.916.6

17.117.5

17.817.4

16.516.1

13.1

10.4

11.8

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09F 10F

Weak economy, credit crunch are hurting auto sales; Gas prices

have been a factor too.

New auto/light truck sales are expected to experience a net drop of 6.5 million units annually by 2009 compared with 2005, a decline of 37%

and the lowest level since the late 1960s

Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth

than problems in the housing market will on home insurers

Auto/Light Truck Sales,1999-2010F (Millions of Units)

Source: US Department of Commerce; Blue Chip Economic Indicators (9/09); Insurance Information Inst.

“Cash for Clunkers” should generate $225M - $375M in net new personal auto premiums

Key Threats Facing Insurers Amid

Financial Crisis

Challenges for theNext 5-8 Years

40

Important Issues & Threats Facing Insurers: 2009 - 2015

Source: Insurance Information Inst.

1. Erosion of Capital Losses are larger and occurring more rapidly than is commonly

understood or presumed Max surplus loss at 3/31/09 was 16%=$85B from 9/30/07 peak P/C policyholder surplus could have been much larger Some insurers propped up results by reserve releases Decline in PHS of 1999-2002 was 15% over 3 years and was

entirely made up and them some in 2003. Current decline was ~16% in 5 qtrs.

During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35%. It took until 1939-40 before these key measures returned to their 1929 peaks.

BOTTOM LINE: Capital and assets could have fallen farther and faster than many believed possible. It will take years to return to the 2007 peaks—likely late 2011/12 (without market relapse).

41



2. Reloading Capital After “Capital Event” Continued asset price erosion coupled with major “capital

event” would have lead to shortage of capital among some companies

Possible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirements

P/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after major events (post-9/11, Katrina). This assumption may be incorrect in the current environment

Cost of capital is much higher today (relative “risk-free” rates), reflecting both scarcity & risk

Implications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh capital & generate internally. Already a reality for some life insurers.

42



3. Long-Term Reduction in Investment Earnings Low interest rates, risk aversion toward equities and many

categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gains

Fed actions in Treasury markets keep yields low Many insurers have not adjusted to this new investment

paradigm of a sustained period of low investment gains Regulators will not readily accept it; Many will reject it Implication 1: Industry must be prepared to operate in

environment with investment earnings accounting for a smaller fraction of profits

Implication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.

Lessons from the period 1920-1975 need to be relearned

43Source: Insurance Information Inst.

4. Regulatory Overreach Principle danger is that P/C insurers get swept into

vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)

Danger is high as feds get their nose under the tent Status Quo is viewed as unacceptable by all Pushing for major change is not without significant

risk in the current highly charged political environment

Insurance & systemic risk Disunity within the insurance industry Impact of regulatory changes will be felt for decades Bottom Line: Regulatory outcome is uncertain and

risk of adverse outcome exists

Important Issues & Threats Facing Insurers: 2009 – 2???


5. Creeping Restrictions on Underwriting Attacks on underwriting criteria such as credit,

education, occupation, territory increasing Industry will lose some battles View that use of numerous criteria are discriminatory

and create an adverse impact on certain populations Impact will be to degrade the accuracy of rating systems

to increase subsidies Predictive modeling also at risk Current social and economic environment could

accelerate these efforts Danger that bans could be codified at federal level

during regulatory overhaul Bottom Line: Industry must be prepared to defend

existing and new criteria indefinitely



8. Emerging Tort Threat No tort reform (or protection of recent reforms) is

forthcoming from the current Congress or Administration

Erosion of recent reforms is a certainty (already happening)

Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability

Torts twice the overall rate of inflation Influence personal and commercial lines, esp. auto liab. Historically extremely costly to p/c insurance industry Leads to reserve deficiency, rate pressure Bottom Line: Tort “crisis” is on the horizon and will be

recognized as such by 2012-2014

Important Issues & Threats Facing Insurers: 2009 -2015

Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical

$0

$50

$100

$150

$200

$250

$300

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

E

20

10

E

Tor

t S

yste

m C

osts

1.50%

1.75%

2.00%

2.25%

2.50%

Tor

t C

osts

as

% o

f G

DP

Tort Sytem Costs Tort Costs as % of GDP

Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

Billions

*Excludes the tobacco settlement, medical malpractice

2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP

Business Leaders Ranking of Liability Systems for 2008

Best States1. Delaware2. Nebraska3. Maine4. Indiana5. Utah6. Virginia7. Iowa8. Vermont9. Colorado10. Kansas

Worst States41. Texas42. Florida43. South Carolina44. California45. Hawaii46. Illinois47. Alabama48. Mississippi49. Louisiana50. West Virginia

Source: US Chamber of Commerce 2008 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2008

CO, IN, KS, VA, VT

Drop-Offs

MN, NH, TN, WI

Newly Notorious

FL, SC

Rising Above

AR, AK

Midwest/West has mix of good and bad states

The Nation’s Judicial Hellholes (2008/2009)

Source: American Tort Reform Association; Insurance Information Institute

ALABAMA

Macon and Montgomery

Counties

South Florida

ILLINOIS

Cook County West Virginia

Watch ListRio Grande

Valley & Gulf Coast, TX

Madison County, IL

Baltimore, MD

St Louis (the city of), St Louis and

Jackson Counties, MO

Dishonorable Mentions

MA Supreme Judicial CourtMO Supreme

Court

NEVADA

Clark County (Las Vegas)

NEW JERSEY

Atlantic County (Atlantic City)

CALIFORNIA

Los Angeles County

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

54

P/C Insurer Impairments,1969-2008

815

12

711

934

913

12

19

916

14

13

36

49

31 3

450

48

55

60

58

41

29

16

12

31

18 19

49 50

47

35

18

14 15

75

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

The number of impairments varies significantly over the p/c insurance cycle,

with peaks occurring well into hard markets

Source: A.M. Best; Insurance Information Institute

55

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2008

90

95

100

105

110

115

120

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

Co

mb

ined

Rat

io

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

ent R

ate

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly

correlated with underwriting

performance and reached record lows in 2007/08

Source: A.M. Best; Insurance Information Institute

2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and barely one-fourth the 0.82% average since 1969

59

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*

Under Review, 63 , 4.3%

Upgraded, 59 , 4.0%

Initial, 41 , 2.8%

Other, 59 , 4.0%

Affirm, 1,183 , 81.0%

Downgraded, 55 , 3.8%

*Through December 19.Source: A.M. Best.

59

Despite financial market turmoil, high cat losses and a soft market in 2008, 81% of ratings actions by A.M. Best

were affirmations; just 3.8% were downgrades

and 4.0% upgrades

P/C insurance is by design a resilient in business. The dual threat of financial

disasters and catastrophic losses are

anticipated in the industry’s risk

management strategy.

61

Reasons for US P/C Insurer Impairments, 1969-2008

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008

Deficient loss reserves and inadequate

pricing are the leading cause of

insurer impairments,

underscoring the importance of

discipline. Investment

catastrophe losses play a much smaller role.

Reinsurance Failure3.7%

Rapid Growth14.3%

Misc.9.1%

Affiliate Impairment

7.9%

Sig. Change in Business

4.2%

Deficient Loss

Reserves/In-adequate Pricing38.1%

Investment Problems

7.0%

Alleged Fraud8.1%

Catastrophe Losses7.6%

Critical Differences Between P/C

Insurers and BanksSuperior Risk Management Model

& Low Leverage Makea Big Difference

63

How Insurance Industry Stability Has Benefitted Consumers

BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating

Normally• The Basic Function of Insurance—the Orderly Transfer

of Risk from Client to Insurer—Continues Uninterrupted• This Means that Insurers Continue to:

Pay claims (whereas 120 banks have gone under as of 9/25/09) The Promise is Being Fulfilled

Renew existing policies (banks are reducing and eliminating lines of credit) Write new policies (banks are turning away people and businesses who

want or need to borrow) Develop new products (banks are scaling back the products they offer) Compete Intensively (banks are consolidating, reducing consumer choice)

Source: Insurance Information Institute63

64

• Emphasis on Underwriting Matching of risk to price (via experience and modeling) Limiting of potential loss exposure Some banks sought to maximize volume and fees and disregarded risk

• Strong Relationship Between Underwriting and Risk Bearing Insurers always maintain a stake in the business they underwrite, keeping “skin in the game”

at all times Banks and investment banks package up and securitize, severing the link between risk

underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101

• Low Leverage Insurers do not rely on borrowed money to underwrite insurance or pay claimsThere is no

credit or liquidity crisis in the insurance industry• Conservative Investment Philosophy

High quality portfolio that is relatively less volatile and more liquid• Comprehensive Regulation of Insurance Operations

The business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives—CDS’s)

• Greater Transparency Insurance companies are an open book to regulators and the public

Source: Insurance Information Institute64

Reasons Why P/C Insurers Have Fewer Problems Than Banks:

A Superior Risk Management Model

Regulatory Reform

Obama Administration’s Plan for Reforming Financial

Services Industry Regulation Will Impact Insurers

Status: Stalled in Congress

66

REGULATORY REFORM: 2009 AND BEYOND

67

Rating of Auto/Home Insurance Regulatory & Operating Environment*

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WVVA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI

MDDE

AL

VT

NY

**DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

GRADE 2009 2008A 4 7

B 10 25 C 17 10D 12 5F 6 4

*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env., regulatory clarity, credit scores, auto market entry/exit, territorial restrictions, political oversight.

**Information not available.

= A

= B

= C

= D

= F

Source: Heartland Institute, May 2009

http://www.heartland.org/custom/semod_policybot/pdf/25091.pdf

Study suggest the insurance regulatory and operating

environments deteriorated in 2009 for auto and home insurance

70

Obama Regulatory Reform Proposal: Plan Components

I. Office of National Insurance (ONI) Duties

1. Monitor “all aspects of the insurance industry”

2. Gather information

3. Identify the emergence of any problems or gaps in regulation that could contribute to a future crisis

4. Recommend to the Federal Reserve insurance companies it believes should be supervised as Tier 1 FHCs

5. Administer the Terrorism Risk Insurance Program

6. Authority to enter into international agreements and increase international cooperation on insurance regulation

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.

71

II. Systemic Risk Oversight & Resolution Authority Federal Reserve given authority to oversee systemic risk

of large federal holding companies (Tier 1 FHCs) Insurers are explicitly included among the types of entities that could be

found to be a Tier 1 FHC

ONI given authority to “recommend to the Federal Reserve any insurance companies that the ONI believes should be supervised as Tier 1 FHC.”

Proposal also recommends “creation of a resolution regime to avoid disorderly resolution of failing bank holding companies, including Tier 1 FHCs “…in situations where the stability of the financial system is at risk.” Directly affects insurers in 2 ways: Resolution authority may extend to an insurer within the BHC structure if

the BHC is failing

If systemically important insurer is failing (as identified by ONI as Tier 1 FHC) resolution authority may apply

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.

Obama Regulatory Reform Proposal: Plan Components (cont’d)

P/C INSURANCE FINANCIAL

PERFORMANCE

A Resilient Industry in Challenging Times

Profitability

Historically Volatile

75

P/C Net Income After Taxes1991-2009:H1 ($ 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

$2,3

79

$5,7

57

-$6,970

$65,

777

$44,

155

$20,

559 $3

8,50

1

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,00091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

09:H

1

*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 4.5% ROAS for 2008 and 2.2%. 2009:Q1 net income was $10.0 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.

2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:H1 ROAS = 2.5%*

Insurer profits peaked in 2006 and 2007, but fell 96.2% during the economic

crisis in 2008

75

76

-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 0809:H1

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2009: H1*

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

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical and volatile

Financial Crisis*

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009:H1*

*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.

The p/c insurance industry fell well short of is cost of capital in 2008

-13.

2 p

ts

US P/C insurers missed their cost of capital by an average 6.7 points from

1991 to 2002, but on target or better 2003-07, but

falling well short in 2008/09

-1.7

pts

+2.

3 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

-7.1

pts

78

-6.0

pts

79

97.5

100.6 100.1 100.7

92.6

99.5101.0

8.9%4.2%

12.7%

14.3% 15.9%

9.6%

4.5%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009:H1*

Co

mb

ined

Ratio

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Retr

un

on

Eq

uity*

Combined Ratio ROE*

* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.

A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At

Combined ratios must me must lower in today’s depressed

investment environment to generate risk

appropriate ROEs

Advertising Trends

Advertising Expenditures by P/C Insurance Industry, 1999-2008

$ Billions

$1.736 $1.737 $1.803 $1.708

$3.426

$4.102$4.354

$2.975

$2.111$1.882

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

99 00 01 02 03 04 05 06 07 08

Source: Insurance Information Institute from consolidated P/C Annual Statement data.

Ad spending by P/C insurers was at a

record high in 2008, signaling strong

competition despite the recession.

P/C Premium Growth

Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy

83

-6%

-4%-2%

0%

2%4%

6%

8%10%

12%

14%16%

18%

20%22%

24%

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

09:H

1

Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute

Strength of Recent Hard Marketsby NWP Growth

1975-78 1984-87 2000-03

83

Net written premiums fell 1.0%

in 2007 (first decline since 1943)

by 1.4% in 2008, and 4.2% in H1 2009, the first 3-

year decline since 1930-33

Shaded areas denote “hard

market” periods

84

$651 $6

68 $691 $7

05

$703

$685

$690 $7

26

$786

$875

$830

$841

$817

$820$8

42

$831

$600

$650

$700

$750

$800

$850

$900

$950

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

Average Expenditures on Auto Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.

Countrywide auto insurance expenditures increased 2.6% in 2008 and are rising at a

4% pace in 2009

85

0.8

%0

.8%

0.5

%0

.4%

0.3

%0

.3%

0.5

%0

.6%

0.5

%0

.1% 0.5

% 0.9

%1

.1%

1.3

% 1.7

%2

.6%

2.6

%2

.7% 3.0

%3

.1% 3.4

% 3.7

% 4.0

%4

.0% 4.3

%4

.4% 4.7

%4

.4% 4.7

%4

.6%

0.2

%

0%

1%

2%

3%

4%

5%

6%

Ja

n-0

7F

eb

-07

Ma

r-0

7A

pr-

07

Ma

y-0

7J

un

-07

Ju

l-0

7A

ug

-S

ep

-07

Oc

t-0

7N

ov

-07

De

c-0

7J

an

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay

-08

Ju

n-0

8J

ul-

08

Au

g-

Se

p-0

8O

ct-

08

No

v-0

8D

ec

-08

Ja

n-0

9F

eb

-09

Ma

r-0

9A

pr-

09

Ma

y-0

9J

un

-09

Ju

l-0

9

Monthly Change in Auto Insurance Prices*

*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics

Auto insurance prices seem to

have leveled off in recent months

86

$508 $5

36

$593

$668

$729 $7

64 $804

$807

$820

$841

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

00 01 02 03 04 05 06 07* 08* 09*

Average Premium for Home Insurance Policies**

*Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.

Countrywide auto insurance expenditures increased 1.6% in 2008 and are increasing at 2.6% annual rate in 2009

87

Average Commercial Rate Change,All Lines, (1Q:2004 – 2Q:2009)

-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%

-6.0

% -5.0

%

-5.0

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

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

KRW Effect

-0.1

% Magnitude of price declines is now

shrinking. Reflects shrinking capital,

reduced investment gains, deteriorating

underwriting performance, higher cat losses and costlier

reinsurance

Merger & Acquisition

Barriers to Consolidation Will Diminish in 2009/10

89

P/C Insurance-Related M&A Activity, 1988-2008

$2,4

35

$5,1

00

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64$3

5,22

1

$13,

615

$16,

294

$55,825

$30,

873

$8,0

59

$11,

534

$1,8

82

$3,4

50$2

,780

$5,1

37

$5,6

38

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

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

Tran

sact

ion

Val

ue ($

Mill

)

0

20

40

60

80

100

120

140

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

.

Source: Conning Research & Consulting.

2009 off to a stronger start with AIG unit sales and

Bermuda consolidation

$ Value of deal up 20% in 2009,

volume down 12%

Distribution Sector: Insurance-Related M&A Activity, 1988-2008

$542

$446

$5,8

12

$1,9

34

$7

$1,633

$2,7

20

$689

$60 $212 $9

44

$15,205

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

96 97 99 00 01 02 03 04 05 06 07 08

Tran

sact

ion

Val

ue ($

Mill

)

0

50

100

150

200

250

300

350

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Conning Research & Consulting.

Consolidation within the distribution sector

remains elevated

Capital/Policyholder Surplus (US)

Shrinkage, but

Capital is Within Historic Norms

93

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

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 0809*

U.S. Policyholder Surplus: 1975-2009:H1*

Source: A.M. Best, ISO, Insurance Information Institute. *As of 6/30/09

$ B

illi

ons

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Actual capacity as of 6/30/09 was $463.0B, up from $437.1B as of 3/31/09 Recent peak was $521.8 as of

9/30/07. Surplus as of 6/30/09 is 11.2% below 2007 peak; Crisis trough was as of 3/31/0916.2% below 2007 peak

The premium-to-surplus ratio stood at $0.92:$1 as of

6/30/09, up from near record low of $0.85:$1 at

year-end 2007

93

94

Policyholder Surplus, 2006:Q4 – 2009:H1

$ Billions

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$505.0$515.6

$517.9

$380

$400

$420

$440

$460

$480

$500

$520

$540

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2

Source: ISO, AM Best.

Declines Since 2007:Q3 Peak

08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%)

09:Q2: -$58.8B (-11.2%)

Capacity peaked at $521.8 as of 9/30/07

94

95

Premium-to-Surplus Ratios Before Major Capital Events*

$1.65

$1.42 $1.40

$1.03 $1.03$0.92$0.88

$1.05$1.15

$0.5

$0.7

$0.9

$1.1

$1.3

$1.5

$1.7

$1.9

6/3

0/1

989

Hu

rric

an

eH

ug

o

6/3

0/1

992

Hu

rric

an

eA

nd

rew

12/3

1/9

3N

ort

hri

dg

eE

art

hq

uake

6/3

0/0

1S

ep

t. 1

1A

ttacks

6/3

0/0

4F

lori

da

Hu

rric

an

es

6/3

0/0

5H

urr

ican

eK

atr

ina

6/3

0/0

7F

inan

cia

lC

risis

As o

f3/3

1/0

9**

As o

f6/3

0/0

9**

*

*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Ratio at point of maximum capital erosion; ***Latest availableSource: PCS; Insurance Information Institute.

P/C insurance industry was better capitalized going into the

financial crisis than before any “capital event” in recent history

97

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

3.3%

9.6%

6.9%

10.9%

16.2%

13.8%

6.2%

0%2%4%6%8%

10%12%14%16%18%

6/3

0/1

98

9H

urr

ica

ne

Hu

go

6/3

0/1

99

2H

urr

ica

ne

An

dre

w

12

/31

/93

No

rth

rid

ge

Ea

rth

qu

ak

e

6/3

0/0

1S

ep

t. 1

1A

tta

ck

s

6/3

0/0

4F

lori

da

Hu

rric

an

es

6/3

0/0

5H

urr

ica

ne

Ka

trin

a

Fin

an

cia

lC

ris

is a

s o

f3

/31

/09

**

*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 6/30/09 (latest available) ratio = 11.2%.Source: PCS; Insurance Information Institute.

The financial crisis now ranks as the largest

“capital event” over the past 20+ years

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

NWP % changeSurplus % change

*2009 NWP and Surplus figures are % changes for H1:09 vs H1:08Sources: A.M. Best, ISO, Insurance Information Institute

Historically, Hard Markets Follow When Surplus “Growth” is Negative*

Sharp decline in capacity is a necessary but not sufficient

condition for a true hard market

Investment Performance

Investments are the Principle Source of Declining

Profitability

100

Property/Casualty Insurance Industry Investment Gain:1994- 2009:H11

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.4

$12.4

$56.9$51.9

$57.9

$0

$10

$20

$30

$40

$50

$60

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

Investment gains fell by 51% in 2008 due to lower yields, poor equity market

conditions. Falling again in 2009.

100

101

P/C Insurer Net Realized Capital Gains, 1990-2009:Q1

$2.88$4.81

$9.89

$1.66

$6.00

$9.24$10.81

$13.02

$16.21

$6.63

-$1.21

$6.61$8.92

-$11.17

-$19.80

$18.02

$3.52

$9.70$9.13$9.82

-$20-$18-$16-$14-$12-$10-$8-$6-$4-$2$0$2$4$6$8

$10$12$14$16$18$20

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

09H

1

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

Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7 billion swing from 2007, followed by an $11.2B

drop in H1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.

$ Billions

101

102

0.15% 0.18% 0.30% 0.48%

1.02%

1.55%

2.46%

3.14%3.56%

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

4.41%4.38%

0%

1%

2%

3%

4%

5%

6%

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

July 2009 Yield CurvePre-Crisis (July 2007)

Treasury Yield Curves: Pre-Crisis (July 2007) vs. July 2009

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

Stock dividend cuts will further pressure investment income

Treasury Yield Curve is at its most depressed level in at least 45 years. Investment income will fall as a result.

Distribution of P/C Insurance Industry’s Investment Portfolio

Cash & Short-Term Investments

7.2%

Common Stock17.9%

Bonds66.7%

Preferred Stock1.5%

Real Estate0.8%

Other5.9%

Portfolio Facts

•Invested assets totaled $1.3 trillion as of 12/31/07

•Insurers are generally conservatively invested, with 2/3 of assets invested in bonds as of 12/31/07

•Only about 18% of assets were invested in common stock as of 12/31/07

•Even the most conservative of portfolios was hit hard in 2008

Source: NAIC; Insurance Information Institute research;.

As of December 31, 2007

103

Distribution of P/C Insurance Industry’s Investment Portfolio

Cash & Short-Term Investments

8.0%

Common Stock14.8%

Bonds68.4%

Preferred Stock1.8%

Real Estate0.9%

Other6.2%

Portfolio Facts

•Invested assets totaled $1.2 trillion as of 12/31/08, down from $1.3 trillion as of 12/31/07

•Insurers are generally conservatively invested, with 2/3+ of assets invested in bonds as of 12/31/08

•Only about 15% of assets were invested in common stock as of 12/31/08, down from 18% one year earlier

•Even the most conservative of portfolios were hit hard in 2008

Source: NAIC; Insurance Information Institute research;.

As of December 31, 2008

104

Underwriting Trends

Financial Crisis Does Not Directly Impact Underwriting

Performance: Cycle, Catastrophes Were 2008’s Drivers

106

115.8

107.5

100.198.4

100.8

92.6

99.5101.0

95.7

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009:H1*

P/C Insurance Industry Combined Ratio, 2001-2009:H1*

*Excludes Mortgage & Financial Guaranty insurers in 2008. Including M&FG, 2008=105.1, 2009=100.9 Sources: A.M. Best, ISO.

Best combined ratio since 1949

(87.6)

As recently as 2001, insurers paid out nearly $1.16 for every

$1 in earned premiums

Relatively low CAT

losses, reserve releases

Cyclical Deterioration

106

2005 ratio benefited from heavy use of reinsurance which lowered net losses

107

-55-50-45-40-35-30-25-20-15-10-505

101520253035

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:Q

1

Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers

$ B

illi

ons

Insurers earned a record underwriting profit of $31.7B in 2006 and $19.3B in 2007, the largest ever but only the 2nd and 3rd since 1978. Cumulative underwriting deficit from

1975 through 2008 is $442B.

Underwriting Gain (Loss)1975-2009:H1*

$19.8 Bill underwriting loss in 2008

incl. mort. & FG insurers, -$2.2B in H1:09

107

Large underwriting losses are NOT

sustainable in current investment environment

108

Number of Years With Underwriting Profits by Decade, 1920s –2000s

67

10

8

45

0 0

3

0

2

4

6

8

10

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.

Number of Years with Underwriting ProfitsUnderwriting profits were common before the 1980s (40 of the 60 years

before 1980 had combined ratios below 100)—but then they vanished. Not a single underwriting profit was recorded in the 25 years from 1979

through 2003.

108

Personal Lines

Auto (~75% of Market)Home (~25%)

111

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.294.4

100.3

88.9

95.6

116.9

99

113.0109.4

85

95

105

115

125

135

145

155

165

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

Homeowners Insurance Combined Ratio

Average 1990 to 2008= 111.1

Insurers have paid out an average of $1.11in losses for every dollar earned in premiums over the past 17 years

Sources: A.M. Best (historical ); III forecast for 2009.

112

101.7101.3 101.0

99.5

101.1

103.5

109.5

107.9

104.2

98.4

94.395.1 95.5

98.3

100.299.5

101.3

90

95

100

105

110

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

Private Passenger Auto (PPA) Combined Ratio

Average Combined Ratio for 1993 to 2008 =100.8

Sources: A.M. Best (historical); III forecast for 2009.

PPA is the profit juggernaut of the

p/c insurance industry today

Auto insurers have shown significant

improvement in PPA underwriting

performance since mid-2002, but results

are deteriorating.

Commercial Lines

114

110.

3

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

110.

2

102.

5

105.

4

91.1

95.1

106.

5

105.

1

102.

0

112.

5

85

90

95

100

105

110

115

120

125

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

2006/07 benefited from favorable loss cost trends, improved tort environment, low CAT

losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and

mortgage and financial guarantee segments have big influence. 2009 is transition year.

Commercial coverages have exhibited significant

variability over time.

Commercial Lines Combined Ratio, 1993-2009F

Mortgage and financial guarantee may account for up to 4 points on the commercial

combined ratio in 2008

Sources: A.M. Best (historical and forecasts)

Catastrophic Loss

Catastrophe Losses Trends Are Trending Adversely

122

U.S. Insured Catastrophe Losses$7

.5$2

.7$4

.7$2

2.9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5$5

.9 $12.

9 $27.

5

$6.7

$26.

0$7

.5$1

00.0

$61.

9

$9.2

$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*

20??

*Based on PCS data through June 30 = $7.5 billion.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.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2008 CAT losses exceeded

2006/07 combined. 2005 was by far the worst year ever for

insured catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming

eventually

122

2009 cat losses were down 29% in H1 from $10.6B in H1 2008

Insured Property Catastrophe Losses as % Net Premiums Earned, 1984–2008

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

US

US average: 1984-2008

Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

US CAT losses were a record 14.4% of

net premiums earned in 2005 and

were 4 times the 1984-2008 average

of 3.6%

124

States With Highest Insured Catastrophe Losses in 2008

$ Billions

$10.2

$2.2$1.6 $1.3 $1.0

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

Texas California Minnesota Ohio Georgia

Source: PCS; Insurance Information Institute.

In 2008, insurers paid $26 billion to 3.9 million victims of 37 major

natural catastrophes across 40 states. 64% of the payouts (in $ terms) went

to homeowners, 27% to business owners and 9% to vehicle owners

Top 12 Most Costly Disasters in US History, (Insured Losses, $2008)

$4.2 $5.2 $6.2 $7.3 $8.1 $8.5$11.3 $11.3 $12.5

$22.8 $23.8

$45.3

$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)

Northridge(1994)

Ike(2008)*

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

$ B

illi

ons

*PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.

8 of the 12 most expensive disasters in US history

have occurred since 2004

In 2008, Ike became the 4th most expensive insurance event and 3rd most

expensive hurricane in US history arising from about 1.35 mill claims

126

Total Value of Insured Coastal Exposure (2007, $ Billions)

$2,378.9$895.1

$772.8$635.5

$479.9$224.4

$191.9$158.8$146.9$132.8

$92.5$85.6

$60.6$55.7$51.8$54.1

$14.9

$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

Source: AIR Worldwide

In 2007, Florida still ranked as the #1 most exposed state to hurricane loss,

with $2.459 trillion exposure, an increase of $522B or 27% from $1.937

trillion in 2004.

The insured value of all coastal property was $8.9 trillion in 2007, up

24% from $7.2 trillion in 2004.

$522B increase since 2004, up 27%

128

129

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1988-2007¹

Fire, $8.1 , 2.6%

Tornadoes, $82.4 , 26.5%

All Tropical Cyclones, $141.6 ,

45.6%

Civil Disorders, $1.1 , 0.4%

Utility Disruption, $0.2 , 0.1%

Water Damage, $0.4 , 0.1%Wind/Hail/Flood,

$9.9 , 3.2%

Earthquakes, $19.5 , 6.3%

Winter Storms, $24.4 , 7.9%

Terrorism, $22.9 , 7.4%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Insured disaster losses totaled $310.5 billion from 1988-2007 (in 2007 dollars)

Distribution of US Insured CAT Losses: TX, FL, LA vs US, 1980-2008*

Rest of US, $176, 60%

Louisiana, $33.6, 11%

Texas, $31.2,10%

Florida, $57.1,19%

Florida accounted for 19% of all US insured CAT losses from 1980-2008:

$57.1B out of $297.9B

*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

$ Billions of Dollars

Top 10 Major Disaster Declaration Totals By State: 1953- 2009*

8374

63 6257 55

51 50 49 49 48 46 44 43 42

0

10

20

30

40

50

60

70

80

90

TX CA FL OK NY LA AL KY AR MO IL MS OH WA MN,PA,WV

Total Number

*Through July 2, 2009.Source: Federal Emergency Management Agency (FEMA)

ucky and Ohio are among the states with the most disaster

between 1953-2009*

Government Aid After Major Disasters (Billions)*

$137.1

$48.4

$22.8 $19.5 $17.1 $16.5

$0

$20

$40

$60

$80

$100

$120

$140

$160

Hurricane Katrina(2005)*

Sept. 11 TerroristAttack (2001)

Hurricane Ike(2008)

Hurricane Andrew(1992)

NorthridgeEarthquake (1994)

HurricanesCharley, Frances,

Ivan & Jeanne(2004)

$ B

illi

ons

*Adjusted to 2008 dollars by the Insurance Information Institute.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05; Houston Chronicle, 09/24/08 for Ike.

Hurricane Katrina aid will dwarf aid following all

other disasters. Congress may authorize $150-$200 billion ultimately (about $400,000 for each of the

500,000 displaced families). Is the incentive to buy

insurance and insure to value diminished?

The federal government poured an estimated

$22.8B into areas affected by Hurricane Ike

134

Insurance Information Institute On-Line

THANK YOU FOR YOUR TIME AND

YOUR ATTENTION!

134

Documents

State Insurance Trade Association Annual Conference Cincinnati, OH October 6, 2009