Overview & Outlook for the P/C Insurance Industry:

Focus on Hawaii MarketsHawaii Insurers Council Annual Meeting

Ko Olina, HISeptember 21, 2011

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

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

3

What in the World Is Going On?

Is the World Becoming a Riskier Place?

What Are the Implications for Insurance and Risk Management?

4

Uncertainty, Risk and Fear Abound

Global Economic Slowdown US Debt and Budget Crisis and S&P Downgrade Echoes of the Financial Crisis Housing Crisis Persistently High Unemployment European Sovereign Debt, Bank & Currency Crises Japan, New Zealand, Haiti, Chile Earthquakes Nuclear Fears Record Tornado, Flooding in the US, Wildfires Cyber Attacks Manmade Disasters (e.g., Deepwater Horizon) Resurgent Terrorism Risk (e.g., Bin Laden Killing) Political Upheaval in the Middle East Inflation/Deflation Runaway Energy & Commodity Prices Era of Fiscal Austerity Reshuffling the Global Economic Deck China Becomes #2 Economy in the World Are “Black Swans”

everywhere or does it just seem

that way?

7

Déjà Vu? Lehman II? Is This 2008 All Over Again?Why Today is Not 2008 All Over Again The Situation Today is Very, Very Different from 2008 Credit Markets Are Not Seizing; Some Contraction in Europe Bank Balance Sheets Are in Much Stronger Shape

Capital up, charge offs falling

We Will Not Experience the Collapses/Near Collapses Like in 2008 No repeat of Lehman, AIG, Washington Mutual, Wachovia, Countrywide Financial

Some Additional Regulatory Controls Are Now Place

What Would Be Helpful Now? Long-Term Fiscal and Monetary Policy Direction Fed on Aug. 9 stated rates would remain low “at least through mid-2013”

This is not only a signal that borrowing costs will remain low over an extended period of time and that inflation will remain muted; Also tells investors that they’ll need to take on risk in order to earn returns in the market. Should be bullish for stocks.

Congress and the Administration need to remove regulatory and tax uncertainty ASAP and drive a pro-growth agenda

8

P/C Insurance Industry Financial Overview

Profit Recovery Will Be Set Back by High CATs, Low

Interest Rates, Diminishing Reserve Releases

P/C Net Income After Taxes1991–2011:Q1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

4,6

70

$7

,80

7

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5% 2011:Q1 ROAS = 5.6%

P-C Industry 2011:Q1 profits were down 12.2% to $7.8B vs. $8.9B in 2010:Q1, as underwriting results

deteriorated

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.5% ROAS for 2011:Q1, 7.5% 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 ROEs

Combined Ratio / ROE

* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers. 2011 figure is estimate through first half.Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.3100.8

108.0

101.0

2.5%

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* 2011:H1*0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

A combined ratio of about 100 generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011*

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for Q1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2007:12.3%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years10 Years

2011:6.1%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

12

Profitability and Growth in Hawaii P/C Insurance Markets

Analysis by Line and Nearby State Comparisons

13

RNW All Lines: HI vs. U.S., 2000-2009

Sources: NAIC.

-5%

0%

5%

10%

15%

20%

25%

00 01 02 03 04 05 06 07 08 09

US All Lines HI All Lines

P/C Insurer profitability in HI is above that of the US overall over the past decade

US: 7.0%

HI: 20.5%

(Percent)

14

RNW PP Auto: HI vs. U.S., 2000-2009

Sources: NAIC.

0%

5%

10%

15%

20%

25%

00 01 02 03 04 05 06 07 08 09

US PP Auto HI PP Auto

Average 2000-2009

US: 7.2%

HI: 18.2%

Private Passenger Auto profitability in PA is

generally above the US average

15

RNW Comm. Auto: HI vs. U.S.,2000-2009

Sources: NAIC.

0%

5%

10%

15%

20%

25%

30%

00 01 02 03 04 05 06 07 08 09

US Comm Auto HI Comm Auto

(Percent)Commercial Auto profitability in PA is generally above the

US average

Average 2000-2009

US: 8.5%

HI: 22.0%

16

RNW Comm. Multi-Peril: HI vs. U.S.,2000-2009

Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

00 01 02 03 04 05 06 07 08 09

US Comm M-P HI Comm M-P

(Percent)

Average 2000-2009

US: 8.0%

HI: 26.7%

Commercial Multi-Peril profitability in PA is generally

above the US average

17

RNW Homeowners: HI vs. U.S.,2000-2009

Sources: NAIC.

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

00 01 02 03 04 05 06 07 08 09

US HO HI HO

(Percent)

Average 2000-2009

US: 4.7%

HI: 45.0%

Homeowners profitability in PA was above the US average

over the past decade

18

RNW Workers Comp: HI vs. U.S.,2000-2009

Sources: NAIC.

-5%

0%

5%

10%

15%

20%

25%

30%

00 01 02 03 04 05 06 07 08 09

US WComp HI WComp

(Percent)

Average 2000-2009

US: 6.4%

HI: 15.2%

Workers Comp profitability in PA is generally above the US

average

All Lines: 10-Year Average RNW HI & Nearby States

7.0%

8.7%

9.7%

10.5%

20.5%

5.8%

7.9%

0% 5% 10% 15% 20% 25%

Hawaii

New Mexico

Oregon

California

Arizona

U.S.

Nevada

Source: NAIC, Insurance Information Institute

2000-2009

Hawaii All Lines profitability is above the US and regional average

PP Auto: 10-Year Average RNW HI & Nearby States

7.2%

10.2%

10.2%

11.1%

18.2%

3.6%

8.9%

0% 5% 10% 15% 20%

Hawaii

New Mexico

Oregon

Arizona

California

U.S.

Nevada

Source: NAIC, Insurance Information Institute

2000-2009

Hawaii PP Auto profitability is

above the US and regional average

21

Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2008 (1)

RankMost

expensive statesAverage

expenditure RankLeast

expensive statesAverage

expenditure1 D.C. $1,126 1 North Dakota $503

2 Louisiana 1,105 2 Iowa 519

3 New Jersey 1,081 3 South Dakota 520

4 Florida 1,055 4 Nebraska 547

5 New York 1,044 5 Idaho 562

6 Delaware 1,007 6 Kansas 576

7 Rhode Island 986 7 Wisconsin 581

8 Nevada 970 8 North Carolina 595

9 Connecticut 950 9 Maine 600

10 Maryland 922 10 Indiana 612

(1) Based on average automobile insurance expenditures.

Source: © 2010 National Association of Insurance Commissioners.

Hawaii ranked 18th in 2008, with an average expenditure for auto insurance of $816.

Comm. Auto: 10-Year Average RNW HI & Nearby States

8.3%

10.1%

11.1%

15.1%

22.0%

-2.2%

8.5%

-5% 0% 5% 10% 15% 20% 25%

Hawaii

Oregon

New Mexico

California

U.S.

Arizona

Nevada

Source: NAIC, Insurance Information Institute

2000-2009

Hawaii Commercial Auto profitability is above the US and regional average

Comm. M-P: 10-Year Average RNW HI & Nearby States

6.9%

9.4%

11.1%

13.3%

26.7%

-7.9%

8.0%

-10% 0% 10% 20% 30%

Hawaii

New Mexico

California

Oregon

U.S.

Arizona

Nevada

Source: NAIC, Insurance Information Institute

2000-2009

Hawaii Commercial Multi-Peril profitability is above the US and

regional average

Homeowners: 10-Year Average RNW HI & Nearby States

12.0%

15.5%

15.7%

17.6%

45.0%

4.7%

14.7%

0% 10% 20% 30% 40% 50%

Hawaii

Nevada

Arizona

Oregon

California

New Mexico

U.S.

Source: NAIC, Insurance Information Institute

2000-2009

Hawaii Homeowners profitability is above the US and regional average

25

Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2008 (1)

RankMost

expensive statesAverage

expenditure RankLeast

expensive statesAverage

expenditure1 Texas (3) $1,460 1 Idaho  $387

2 Florida (4) 1,390 2 Utah  432

3 Louisiana  1,155 3 Oregon  439

4 Oklahoma 1,048 4 Washington 471

5 Massachusetts  1,026 5 Wisconsin  503

6 New York  983 6 Delaware  535

7 Connecticut 980 7 Ohio  565

8 Mississippi  980 8 Maine 572

9 D.C.  926 9 Pennsylvania  586

10 Kansas 916 10 Kentucky  601

(1) States with the same premium receive the same rank.(2) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those

specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.(3) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms.(4) Florida data excludes policies written by Citizen's Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly

comparable to other states.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data.

Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

Hawaii ranked as the 12th most expensive state for homeowners insurance in 2008, with an average expenditure of $862.

Workers Comp: 10-Year Average RNW HI & Nearby States

4.6%

6.4%

8.7%

14.3%

15.2%

4.0%

5.0%

0% 5% 10% 15% 20%

Hawaii

Nevada

New Mexico

U.S.

Oregon

California

Arizona

Source: NAIC, Insurance Information Institute

2000-2010

Hawaii Workers Comp profitability is above the

US average and regional average

27

All Lines DWP Growth: HI vs. U.S., 2001-2010

Source: SNL Financial.

12.0

% 14.3

%

9.8%

7.4%

2.2% 3.

4%

0.5%

-2.1

%

-3.3

%

0.0%

13.6

%

14.4

%

11.6

%

8.6%

8.4%

7.9%

0.7%

-5.2

%

-6.3

%

-2.3

%

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10

US DWP: All Lines HI DWP: All Lines

(Percent)

28

Comm. Lines DWP Growth: HI vs. U.S., 2001-2010

Source: SNL Financial.

15

.3%

19

.0%

11

.4%

4.5

%

3.3

%

5.4

%

0.2

%

-1.2

%

-7.3

% -2.5

%

18

.4%

21

.6%

12

.4%

8.4

%

7.9

%

8.4

%

-1.9

%

-8.9

%

-11

.0% -4

.8%

-20%

-10%

0%

10%

20%

30%

01 02 03 04 05 06 07 08 09 10

US DWP: Comm. Lines HI DWP: Comm. Lines

(Percent)

29

Personal Lines DWP Growth: HI vs. U.S., 2001-2010

Source: SNL Financial.

8.2

% 11

.1%

9.2

%

5.4

%

2.3

%

2.3

%

1.2

%

-0.1

%

1.1

% 2.5

%

8.6

%

5.6

%

11

.4%

9.7

%

9.5

%

7.5

%

4.4

%

0.0

%

-0.5

%

0.5

%

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10

US DWP: Personal Lines HI DWP: Personal Lines

(Percent)

30

Private Passenger Auto DWP Growth: HI vs. U.S., 2001-2010

Source: SNL Financial.

8.2%

10.2

%

7.9%

3.6%

0.6%

0.5%

0.0%

-0.1

% 1.5%

4.6%

6.5%

10.5

%

7.8%

-2.7

% -1.6

%

-0.4

%

6.8%

3.8%

-1.7

%

0.2%

-5%

0%

5%

10%

15%

01 02 03 04 05 06 07 08 09 10

US DWP: PP Auto HI DWP: PP Auto

(Percent)

31

Homeowner’s MP DWP Growth: HI vs. U.S., 2001-2010

Source: SNL Financial.

8.3

%

14

.4%

13

.5%

11

.1%

7.3

%

7.4

%

4.2

%

0.5

%

3.9

%

4.9

%

23

.9%

2.7

%

14

.0% 16

.2%

17

.7%

17

.6%

14

.6%

3.6

%

3.9

%

4.5

%

0%

5%

10%

15%

20%

25%

01 02 03 04 05 06 07 08 09 10

US DWP: HO Lines HI DWP: HO Lines

(Percent)

Catastrophe Loss Developments and Trends

32

2011 and 2010 Are Rewriting Catastrophe Loss and

Insurance History

33

Global Catastrophe Loss Summary: First Half 2011

2011 Is Already (as of June 30) the Highest Loss Year on Record Globally

Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss

$260 Billion in Economic Losses Globally

New record for the first six months, exceeding the previous record of $220B in 2005

Economy is more resilient than most pundits presume

$55 Billion in Insured Losses Globally

More than double the first half 2010 amount

Over 4 times the 10-year average

$27 Billion in Economic Losses in the US

Represents a 129% increase over the $11.8 billion amount through the first half of 2010

$17.3 Billion in Insured Losses in the US Arising from 100 CAT Events

Represents a 162% increase over the $6.6 billion amount through the first half of 2010

Geophysical events(earthquake, tsunami, volcanic activity)Meteorological events (storm)

Hydrological events(flood, mass movement)

Selection of significant loss events (see table)

Natural catastrophes

Earthquake, tsunami Japan, 11 March

EarthquakeNew Zealand, 22 Feb

Cyclone Yasi Australia, 2 Feb

Landslides, flash floodsBrazil, 12/16 Jan

Floods, flash floods Australia, Dec 2010-Jan 2011

Severe storms, tornadoesUSA, 22–28 April

Severe storms, tornadoesUSA, 20–25 May

WildfiresUSA, May–June

EarthquakeNew Zealand, 13 June

FloodsUSA, April–June

Climatological events(extreme temperature, drought, wildfire)

Number of Events: 355Number of Events: 355

Natural Loss Events,January – June 2011

World Map

34Source: MR NatCatSERVICE

Insured losses 2011 (January – June only): US$ 60bnInsured losses 2011 (January – June only): US$ 60bn

Worldwide Natural Disasters 2011% Distribution of Insured Losses Per Continent (January – June only)

36

21%21%

49%49%

<1%

29%29% <1%

<1%

Source: MR NatCatSERVICE

Insured losses 1980 - 2011 (January – June only): US$ 389bn Insured losses 1980 - 2011 (January – June only): US$ 389bn

37Source: MR NatCatSERVICE © 2011 Munich Re

58%58%

2%

21%21%

<1%

12%12%

6%

Worldwide Natural Disasters, 1980-2011% Distribution of Insured Losses Per Continent (January – June only)

39

US Second Quarter Insured Catastrophe Losses, 2000–2011

$5.04

$2.30

$7.11

$4.47

$6.38

$15.09

$0.93

$2.33

$5.05

$2.79

$6.24

$1.46

$0

$2

$4

$6

$8

$10

$12

$14

$16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sources: ISO/PCS; Insurance Information Institute.

Record Q2 (and First Half) CAT Losses Will Adversely Impact Insurer Results in 2011

$ Billions

Q2 CAT losses from 2000-2010 average $4.0 billion. 2011:Q2

CAT losses were nearly 4 times that amount at $15.09 billion

2011:Q2 CAT losses totaled

$15.09 billion and are the highest on

record

41

Top 16 Most Costly World Insurance Losses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

$11.3$14.0 $14.0$14.9$20.5$20.8 $23.1$24.9

$35.0

$72.3

$10.0$9.3$9.0$8.0$8.0$7.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

WinterStormDaria(1991)

ChileQuake(2010)

Hugo (1989)

TyphoonMirielle(1991)

Charley(2004)

NewZealandQuake(2011)

Rita (2005)

SpringTornadoes

(2011)

Wilma(2005)

Ivan (2004)

Ike (2008)

Northridge(1994)

WTCTerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado season would likely become the 9th

costliest event in global insurance history

3 of the top 15 most expensive

catastrophes in world history have occurred in the past 18 months

100

200

300

400

500

600

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

Worldwide Natural Disasters,1980 – 2011*

Number of Events

*2011 figure is through June 30.Source: MR NatCatSERVICE 42

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami, volcanic eruption)

Already 355 events through the first 6

months of 2011

US

$bn

Worldwide Natural Disasters 1980–2011,Overall and Insured Losses*

43

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

*2011 figure is through June 30.Source: MR NatCatSERVICE © 2011 Munich Re

50

100

150

200

250

300

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

First Half 2011

Overall Losses: $265 Bill

Insured Losses: $60 Bill

52

1,1

33

1,1

32 1

,29

7

1,1

73

1,0

82 1,2

34

1,1

73

1,1

48

1,4

24

1,3

45

1,0

71 1,2

16

94

1

1,3

76

1,2

64

1,1

03

1,0

98

1,6

92

1,1

56 1,2

82

1,819

1,5

85

537

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

Nu

mb

er

of

To

rna

do

es

0

100

200

300

400

500

600

Nu

mb

er o

f De

ath

s

Number of Tornadoes

Number of Deaths

*2011 is preliminary data through June 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 500 lives

There were already 1,585 tornadoes in the US by June 30

Insurers Expect to Pay $2 Billion on 165,000 Claims Arising from the April 2011 Tornadoes in the Birmingham and Tuscaloosa Areas

Insurers Making a Difference in Impacted Communities

Source: Insurance Information Institute 53

Destroyed home in Tuscaloosa. Insurers will pay some 165,000

claims totaling $2 billion in the Tuscaloosa/

Birmingham areas alone.

Presentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm

Recovery Fund

Insurers Making a Difference in Impacted Communities

Source: Insurance Information Institute 54

House nearly swept into the East Battenkill River

just south of Manchester, VT, after

Irene (pic taken 9/7/11)

Closed restaurant on Misquamicut Beach, RI, due to comprising of wooden deck from Irene storm surge. Owner had a NFIP flood

policy—business is 50 ft. from water line. (pic taken 9/4/11)

Location of Tornadoes in the US, January 1—June 30, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 56

1,585 tornadoes killed 537 people through June 30, including at least 340 on April 26 mostly in the

Tuscaloosa area, and 130 in Joplin

on May 22

Location of Large Hail Reports in the US, January 1—June 30, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 57

There were 7,176 “Large Hail”

reports through June 30, causing extensive damage

to homes, businesses and

vehicles

Location of Wind Damage Reports in the US, January 1—June 30, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 58

There were 11,283 “Wind Damage” reports through

June 30, causing extensive damage

to homes and, businesses

Severe Weather Reports,January 1—June 30, 2011

59Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

There have been 20,044

severe weather reports through

June 30; including 1,585

tornadoes; 7,176 “Large Hail” reports

and 11,283 high wind events

Large Hail, 7,176 , 36%

Wind Damage,

11,283 , 56%

Tornadoes, 1,585 , 8%

Tornadoes accounted for just 8% of all Severe Weather

Reports through June 30 but more than 500 deaths

Number of Severe Weather Reports in US, by Type: January 1—June 30, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

61

US CATASTROPHE INSURED LOSS UPDATE

First Half 2011 CAT Losses Already Exceed All of 2010 and Could Become One of the Most

Expensive Years on Record

62

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$1

3.6

$1

7.3

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$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 half 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; Insurance Information Institute.

First Half 2011 US CAT Losses Already Exceed Losses from All of 2010. Even Modest Hurricane Losses Will Make 2011 Among the

Most Expensive Ever for CATs

$100 Billion CAT Year is Coming Eventually

Record Tornado Losses Caused

H1 CAT Losses to Surge

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

64

Top 12 (13?) Most Costly Disastersin U.S. History

(Insured Losses, 2010 Dollars, $ Billions)

*Losses will actually be broken down into several “events” as determined by PCS.Sources: PCS; Insurance Information Institute inflation adjustments.

$11.5 $12.8 $14.0$17.5

$22.6 $23.1

$45.8

$8.6$8.2$6.7$6.3$5.3$4.3

$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)

Ike (2008)

SpringTornadoes*

(2011)

Northridge(1994)

Andrew(1992)

9/11 Attack(2001)

Katrina(2005)

Taken as a single event, the Spring 2011 tornado season

would likely become 5th costliest event in US insurance history

65

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011:H1*

*Insurance Information Institute estimates for 2010 and 2011:H1Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6 3.

35.

0

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

E

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

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 4.15*

Combined Ratio Points

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2011*Number of Events (Annual Totals 1980 – 2010 and First Half 2011)

*Through June 30.Source: MR NatCatSERVICE 66

50

100

150

200

250

300

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

There were 98 natural disaster events in the first

half of 2011

37

8

51

2

U.S. Thunderstorm Loss Trends, 1980 – 2011*

67

Average thunderstorm losses are up more

than 8 fold since the early 1980s

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2011 are the most expensive

years on record.

Thunderstorm losses in the first half of 2011 totaled $16.4 billion, a new

annual record through just 6 months

*Through June 30, 2011.Source: Property Claims Service, MR NatCatSERVICE

Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals) vs. First Half 2011

68

Insured winter storm losses in 2011 totaled $1.4 billion and are up 50% since 1980.

Source: National Forest Service, MR NatCatSERVICE

U.S. Acreage Burned by Wildfires, 1980 – 2010 (Annual Totals) vs. First Half 2011

69

2011 could be a severe year for wildfire damage. Acres

burned through June 30 already exceed all of 2010.

71

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H11

0.2%

2.4%

3.4%4.9%

6.6%

8.0%

31.8%

42.7%

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, $160.5

Fires (4), $9.0

Tornadoes (2), $119.5

Winter Storms, $30.0

Terrorism, $24.9

Geological Events, $18.5

Wind/Hail/Flood (3), $12.7

Other (5), $0.6

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Number of Federal Disaster Declarations, 1953-2011*

13 1

7 18

16

16

7 71

21

22

22

02

52

51

11

11

92

91

71

74

84

64

63

83

02

2 25

42

23

15

24

21

34

27 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

17

7

43

0

10

20

30

40

50

60

70

80

90

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*

*Through September 3, 2011.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Will Set a Record in 2011

The number of federal disaster declarations will set a new record in 2011, with 77 declarations through Sept 3.

There have been 2,027 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

73

Federal Disasters Declarations by State, 1953 – June 30, 2011: Highest 25 States

85

78

70

63 63

56 55 54 52 52 51 50 49 47 46 46 45 45 44 44 44 42 42

39 39

0

10

20

30

40

50

60

70

80

90

100

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

Dis

aste

r Dec

lara

tions

Source: FEMA.

Over the past nearly half century, Texas has had the highest number

of Federal Disaster Declarations

74

Federal Disasters Declarations by State, 1953 – June 30, 2011: Lowest 25 States

39 38

36 35 35

30 29

27

25 25 25 25 24 23 23

20 20

17 16 15 15

13

9 8 8 8

0

10

20

30

40

50

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

Dis

aste

r Dec

lara

tions

Source: FEMA.

The BIG Question:When Will the Market Turn?

75

Insurance Cycle Dynamics

76

Criteria Necessary for a “Market Turn”:All Four Criteria Must Be Met

Criteria Status Comments

Sustained Period of

Large Underwriting

Losses

Not Yet Happened, But

Inevitable

•Apart from Q2:2011, overall p/c underwriting losses remain modest•Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market)•Prior-year reserve releases continue reduce u/w losses, boost ROEs

Material Decline in Surplus/ Capacity

Entered 2011 At Record

High; Since Fallen

•Surplus hit a record $565B as of 3/31/11•Analysts est. excess surplus of $75-$100B•Some excess capacity may still remain in reinsurance markets•Weak growth in demand for insurance is insufficient to absorb much excess capacity

Tight Reinsurance

MarketSomewhat in

Place•Higher prices in Asia/Pacific•Modestly improved pricing for US risks

Renewed Underwriting

& Pricing Discipline

Not Broadly Evident; Some

Firming

•Commercial lines pricing trends turning from negative to flat•Competition remains intense as many seek to maintain market share•Terms & conditions—no broad tightening

Sources: Barclays Capital; Insurance Information Institute.

1. UNDERWRITING

78

Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?

79

P/C Insurance Industry Combined Ratio, 2001–2011:H1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.1 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).

95.7

99.3100.8

108.0

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

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

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Underwriting Gain (Loss)1975–2011*

* Includes mortgage and financial guaranty insurers in all years. 2011 figure is annualized based on actual Q1 underwriting losses of $4.463 billion.Sources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011*

The industry recorded a $10.4B underwriting loss in 2010 compared

to $3.0B in 2009

Cumulative underwriting deficit from 1975 through

2009 is $445B

($ Billions)Underwriting losses in 2011 will be much larger:

$17.9B based on

annualized Q1 data

82

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

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

11

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

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

Financial Strength & Underwriting

83

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

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20108

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 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.

86

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

87

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

88

Performance by Segment:Commercial Lines &

Reinsurance

Commercial Multi-Peril Combined Ratio: 1995–2011P

119.

0

119.

8

108.

5

125.

0

116.

2

116.

1

104.

9

101.

9

105.

4

95.4 97

.7

94.2 96

.2100.

7

116.

8

113.

6

115.

3 122.

4

115.

0

117.

0

97.3

89.0

97.7

93.8

83.8

89.8

108.

4

98.6 10

2.5

105.

0113.

1

115.

0 121.

0

80

8590

95

100105

110

115

120125

130

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

CMP-Liability CMP-Non-Liability

Commercial Multi-Peril Underwriting Performance is Expected to Deteriorate Modestly

*2011P figure is III estimate for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.

Commercial Auto Combined Ratio: 1993–2011P

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4 94

.3 96

.8 99

.5

98

.0 10

0.0

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

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

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

Commercial Auto Underwriting Performance is Expected to Deteriorate Modestly

Inland Marine Combined Ratio: 1999–2011P

101.9

92.8

100.2

83.8

77.379.5

93.2

89.3

86.1

93.0

80.882.5

89.9

70

75

80

85

90

95

100

105

99 00 01 02 03 04 05 06 07 08 09 10 11P

Inland Marine is Expected to Remain Among the Most Profitable of All Lines

Sources: A.M. Best (historical); Insurance Information Institute estimate for 2011.

Workers Compensation Combined Ratio: 1994–2011P

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4

10

3.6

10

4.4 1

10

.6 11

6.8

11

8.012

1.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

130

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

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best (1994-2010); Insurance Information Institute (2011P).

Homeowners Insurance Combined Ratio: 1990–2011P

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

94

.4 10

0.3

88

.9 95

.6

11

6.8

10

5.7

10

6.7 11

5.0

11

8.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

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

Homeowners Line Could Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to

Local Catastrophe Loss Activity

Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P).

Private Passenger Auto Combined Ratio: 1993–2011P

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.2

10

1.3

10

1.0

10

1.0

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11P

Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry

Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P).

2. SURPLUS/CAPITAL/CAPACITY

96

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

98

Policyholder Surplus, 2006:Q4–2011:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8$556.9

$564.7

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

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

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%)11:Q4: +$42.9B (+8.2%)

Surplus set a new record in 2011:Q1*

*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 $0.77 of

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

105

3. REINSURANCE MARKET CONDITIONS

Has Record Global Catastrophes Activity

Erased Enough Capacity to Turn Markets?

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

Significant Market Losses by Event, 1985-2011*

Reinsurers are bearing a very high

share of recent catastrophe losses

Losses are putting pressure on property cat reinsurance prices in affected

regions. The impact for US property catastrophe pricing is uncertain.

4. RENEWED PRICING DISCIPLINE

112

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

113

-5%

0%

5%

10%

15%

20%

25%

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

Soft Market Persisted in 2010 but Growth Returned: More in 2011?

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

*2011 figure is an estimate based on Q1 data. 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

2011:Q1 growth was +3.5%; First Q1 growth since 2007

114

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%3.

5%

-10%

-5%

0%

5%

10%

15%

20%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

The long-awaited uptick. In 2011:Q1 occurring in

personal lines predominating cos.

(+3.8%) and commercial lines predominating cos.

(+3.5%)

115

Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2011)

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

%

-2.7

%

-3.0

%

-5.3

%

-9.6

%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-6.4

% -5.2

%

-5.4

%

-2.9

%-0

.1%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

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

KRW Effect

Pricing is flat for the first time in more than

7 years

(Percent)

Q2 2011 decreases were the smallest

since 2004, perhaps signaling a market

firming

116

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q2

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

Percentage Change (%)

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since

Market has Been Soft for 7 years and Remains Soft as Capital Hits Record Levels;

But Is Softness Moderating?

KRW Effect: No Lasting Impact

Trough = 2007:Q3 -13.6%

Peak = 2001:Q4 +28.5%

117

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q2

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

1999:Q4 = 100

Pricing today is where is was in

Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for

larger risks

118

Change in Commercial Rate Renewals, by Line: 2011:Q2

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

Major Commercial Lines Renewed Mixed in Q2:2011, With Workers Up More than Any Other Line

Percentage Change (%)

0.5%1.0%

2.2%2.6%

-1.5%

-0.7%-0.4% -0.2%

0.3% 0.5%

-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.2

93.7

104.1

98.9

101.2102.0

111.1112.3

122.3

$7

.30

$6

.49

$1

3.9

1

$1

3.1

5

$1

1.9

4

$1

1.5

5

$1

0.6

8

$1

0.3

5

$1

0.0

2

$1

1.9

5

$8

.30

$1

3.5

0

$8

.42

$4

.83

$5

.20

$5

.71

$5

.25

$5

.70

$7

.70

$6

.40

$6

.10

90

95

100

105

110

115

120

125

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

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

$0

$2

$4

$6

$8

$10

$12

$14

Co

st

of

Ris

k/$

10

00

Re

ve

nu

e

CommercialCombined RatioCost of Risk

Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information Institute

Cost of Risk vs. Commercial Lines Combined Ratio

The cost of risk cannot continue to fall as actual

results deteriorate

121

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

0

5

10

15

20

25

30

35

40

45

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

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

122

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

Pe

ce

nt

ch

an

ge

(%

)

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

124

Other Cycle-Influencing Factors

Could Other Factors Act as a Catalyst to Turn the

Market?

INVESTMENTS: THE NEW REALITY

125

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q11

$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

$13.5

$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 11:Q1

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

Fall by 50% in 2008

1 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

127

Treasury Yield Curves: Pre-Crisis (July 2007) vs. August 2011*

0.02% 0.02% 0.06% 0.11% 0.23%

1.63%

2.30%

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

1.02%

0.38%

3.65%

3.20%

0%

1%

2%

3%

4%

5%

6%

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

August 2011 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level

in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2013.

The End of the Fed’s Quantitative Easing Is Unlikely to Push Interest Rates Up Substantially Given Ongoing Economic Weakness

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

129

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

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

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

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

Shifting Legal Liability & Tort Environment

130

Is the Tort PendulumSwinging Against Insurers?

131

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

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10E 12E

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A

Tort Costs Have Remained High but Relatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as

the Economy Expands

Business Leaders Ranking of Liability Systems in 2010

Best States

1. Delaware

2. North Dakota

3. Nebraska

4. Indiana

5. Iowa

6. Virginia

7. Utah

8. Colorado

9. Massachusetts

10. South Dakota

Worst States

41. New Mexico

42. Florida

43. Montana

44. Arkansas

45. Illinois

46. California

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2010

North Dakota Massachusetts South Dakota

Drop-offs

Maine Vermont Kansas

Newly Notorious

New Mexico Montana Arkansas

Rising Above

Texas South Carolina Hawaii

Midwest/West has mix of good and bad states.

133

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

NevadaClark County

Watch List

Madison County, IL Atlantic County, NJ St. Landry Parish,

LA District of Columbia NYC and Albany,

NY St. Clair County, ILDishonorable

Mention

MI Supreme Court City of St. Louis CO Supreme Court

CaliforniaLos Angeles

and Humboldt Counties

Philadelphia

Inflation

136

Is it a Threat to Claim Cost Severities

137

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

3.1

2.1 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 9/11 (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.

Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years

719.8

1589.8

0

300

600

900

1200

1500

1800

61 66 71 76 81 86 91 96 01 06 11*

Inde

x V

alue

(196

1=10

0)

All ItemsMedical Care

*Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics)

A claim that cost $1,000 in 1961 would cost nearly $16,000 based on

medical cost inflation trends over the past 50 years.

Regulatory Environment & Financial Services Reform

139

Insurers Not as Impacted as Banks, But Dodd-Frank

Implementation Has Been a Concern for Insurers

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI B

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

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

Source: Heartland Institute, May 2011

B B+

B+

D

B

C-

B-

B+

B+C-

B+C-

B

C+

C-

C-

B- D-

B

F

D

C-

C-C+

B+

B+

B+

A+

A+

C-

B

A

A

B

C+

C+

B-

B-

C+

C

F

D+F

D+

B

C+

F F

D-

2010 Property and Casualty InsuranceRegulatory Report Card

Not Graded: District of Columbia

Pennsylvania’s regulatory environment got a grade of

“C” in 2010

141

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

Roy Woodall, former KY Ins. Comm. & industry executive has been nominated for the insurance industry seat

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

Determination of criteria to identify systemically risky firms is incomplete

Federal Insurance Office (FIO) Established 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 became first FIO Director on June 1

Creation of Federal Advisory Committee on Insurance to Advise FIO

Concern: Will FIO Morph Into a Quasi or Shadow 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

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

142

Growth Would Also Help Absorb Excess Capital

143

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 9/11; 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

%

3.9

%

3.8

%

2.5

%

2.3

%

0.4

%

1.0

%

1.9

%

2.1

%

2.1

%

2.4

%

2.6

%2

.8%4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

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

2011 got off to a sluggish start, but growth is expected to proceed at a more modest, though still relatively weak

pace through 2012

2011 Financial Overview State Economic Growth Varied in 2010

144

Texas had one of the stronger economies in 2010 and has

generally outperformed during the economic

downturn

Hard hit Midwest and Northeast states finally

entering recovery in 2010

145

(Millions of Units)

New Private Housing Starts, 1990-2016F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.5

9 0.7

1

1.2

0 1.3

3 1.4

3

1.5

0

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 9/11); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

The plunge and lack of recovery in homebuilding and in construction in general is

holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

146

16.9

16.5

16.1

13.2

10.4

11.6 12

.6 13.4

14.7 15

.1

15.0 15

.5

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

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

(Millions of Units)

Auto/Light Truck Sales, 1999-2016F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 9/11); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Manufacturing Sector.

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2011-12 is

still far below 1999-2007 average of 17 million units, but a recovery is underway.

Job growth and improved credit market conditions will boost auto sales in

2011 and beyond

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Ju

n 1

0

Se

p 1

0

De

c 1

0

Ma

r 1

1

Ju

n 1

1

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 147

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 77.5% of industrial

capacity in July 2011, above the June 2009

low of 68.3%

December 2007-June 2009 Recession

58

.3

57

.1

60

.4

59

.6

57

.8

55

.3

55

.1

55

.2

55

.3 56

.9 58

.2

58

.5 60

.8

61

.4

61

.2

60

.4

53

.5 55

.3

50

.9

50

.6

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through August 2011

The manufacturing sector has been expanding and adding jobs. The question is whether this will continue.

Source: Institute for Supply Management; Insurance Information Institute

Optimism among manufacturers dropped

sharply beginning in May.

74

.4

73

.6

73

.6

72

.2

73

.6 76

67

.8

68

.9

68

.2

67

.7 71

.6 74

.5

74

.2 77

.5

67

.5 69

.8

74

.3

71

.5

63

.7

55

.7

40

45

50

55

60

65

70

75

80

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Consumer Sentiment Survey (1966 = 100)

January 2010 through August 2011

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

impact comsumers.

Source: University of Michigan; Insurance Information Institute

Optimism among consumers plunged amid the debt debate debacle

and S&P downgrade

151

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8224

,680

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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

Business Bankruptcy Filings,1980-2011:H1

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

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

2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009—which were up 40%

from 2008 and the most since 1993. 2011:H1 filings are down 15.1% from 2010:Q2.

% Change Surrounding Recessions

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

152

Private Sector Business Starts, 1993:Q2 – 2010:Q4*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

207

199

191 19

317

2 176

169

184

172

172

182

196

203

150

160

170

180

190

200

210

220

230

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

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

* Data through December 31, 2010 are the latest available as of September 8, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

722,000 new business starts were recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new business starts since 1993.

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

153

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

154

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

155

Unemployment and Underemployment Rates: Stubbornly High in 2011

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 9.1% in

August

Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years:

10.8% in November -

December 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 16.1% in August 2011

January 2000 through August 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure

Aug 11

18

67

92

13

65 1

27

42

15

-10

9-1

46

5 97

23

-12

-85 -58

-16

1-2

53

-23

0-2

57

-34

7-4

56

-54

7-7

34 -66

7-8

06 -7

07

-74

4 -64

9-3

34

-45

2-2

97 -2

15

-18

6-2

62

75

-83

16 6

2

22

95

1 61 1

17

14

31

12 1

93

12

8 16

79

42

61

21

92

41

99

75

15

61

7

14

4

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1

Monthly Change in Private Employment

January 2008 through August 2011* (Thousands)

Private Employers Added 2.585 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

Private employers added jobs in every month in 2010 for a total of

1.435 million for the year

17,000 private sector jobs were created in August

159

Unemployment Rates by State, July 2011:Highest 25 States*

12.9

12.0

10.9

10.9

10.8

10.8

10.7

10.4

10.1

10.1

10.0

9.8

9.5

9.5

9.5

9.5

9.4

9.4

9.3

9.1

9.1

9.0

8.7

8.5

8.5

8.4

0

2

4

6

8

10

12

14

NV CA MI SC DC RI FL MS GA NC AL TN IL KY NJ OR AZ ID WA CT US OH MO CO IN TX

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for July 2011, seasonally adjusted.

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

In July, 28 states and the District of Columbia reported over-the-month

unemployment rate increases, 9 had decreases, and 13 had no change.

160

8.2

8.1

8.1

8.0

7.8

7.8

7.7

7.7

7.7

7.6

7.6

7.5

7.2

7.2

6.7

6.5

6.1

6.1

6.0

5.8

5.7

5.5

5.2

4.7

4.1

3.3

0

2

4

6

8

10

AR DE WV NY PA WI AK ME MT LA MA UT MD MN NM KS HI VA IA WY VT OK NH SD NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, July 2011: Lowest 25 States*

*Provisional figures for July 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In July, 28 states and the District of Columbia reported over-the-month

unemployment rate increases, 9 had decreases, and 13 had no change.

The unemployment rate in North Dakota was just

3.3% in July, well below the 9.1% overall US rate

Hawaii’s unemployment rate is well below the

national average

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

164

Payroll Base* WC NWP

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

*Private employment; Shaded areas indicate recessions. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

29% of NPW has been eroded away by the soft market and weak economy

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

165

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

34

.4

23

.1

14

.2

10

.2

9.0

4.6

1.4

-3.7

-7.3

-9.3

-10

.0

-10

.3

-10

.9

-10

.9

-13

.0

-14

.7

-15

.3

-15

.9

-16

.9

-17

.8

-19

.8

-21

.4

-21

.7

-35-30-25-20-15-10-505

10152025303540

OK

MT ID LA

SD IA KS

NY WI

PA

MS IL

NM NJ

NE

MD

NC AL

CT VA

SC

AR

MN

Pe

ce

nt

ch

an

ge

(%

)

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Only 7 (small) states showed growth in workers

comp premium volume between 2005 and 2010

166

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

-22

.6

-23

.7

-24

.2

-25

.0

-25

.2

-25

.2

-25

.3

-26

.8

-26

.9

-28

.1

-28

.3

-28

.7

-29

.0

-30

.1

-32

.5

-32

.6

-33

.8

-34

.7

-36

.1

-42

.7

-45

.4

-50

.7

-51

.2

-57

.7

-70

-60

-50

-40

-30

-20

-10

0

AZ

ME

GA

KY IN NH

OR

DC

MA

TN VT

US

TX

AK

MO MI

UT RI

CO

DE

NV HI

CA

FL

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

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

the past 5 years

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.

Sources: SNL Financial LC.; Insurance Information Institute.

Workers Comp DPW plunged 28.7% from

between 2005 and 2010

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