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The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting Seminar February 23, 2010 Chicago, IL Download at www.iii.org/presentations Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 [email protected]

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Page 1: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

The Commercial P/C Insurance Industry in the Aftermath of the

“Great Recession”National Association of Mutual Insurance Companies

Commercial Lines Underwriting Seminar February 23, 2010

Chicago, ILDownload at www.iii.org/presentations

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

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

Page 2: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

3

The Economic Storm

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

Exposure Base, Growth and Profitability

Page 3: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

4

Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/10; Insurance Information Institute.

2.9

%

0.1

%

4.8

%

4.8

%

-0.2

%

-0.7

%

1.5

%

-2.7

%

-5.4

%

-6.4

%

-0.7

%

2.2

%

5.7

%

2.8

%

2.8

%

2.8

%

3.0

%

3.0

%

3.2

%

3.3

%

3.2

%

3.7

%

0.8

%

1.6

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

   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

Personal and Commercial Lines Exposure Base Have Been Hit Hardand Will Be Slow to Come Back

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 Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4%

Economic growth up sharply in Q4:09 with rebuilding of inventories and stimulus.

More moderate growth expected in 2010/11

Page 4: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

6

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

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/10; Insurance Information Institute

4.3

%1

8.6

%2

0.3

%5

.8%

0.3

%-1

.6%

-1.0

%-1

.8%

-1.0

%3

.1%

1.1

%0

.8%

0.4

%0

.6%

-0.4

%-0

.3%

1.6

% 5.6

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.8%

-3.8

%

5.2

%-0

.9%

-7.4

%-6

.5% -1

.5%

1.8

%

-10%

-5%

0%

5%

10%

15%

20%

25%

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

Real NWP Growth Real GDP

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

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

Page 5: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

7

Regional Differences Will Significantly Impact P/C Markets

Recovery in Some Areas Will Begin Years Ahead of Others

and Speed of Recovery Will Differ by Orders of Magnitude

Page 6: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

8

State Economic Growth Varied Tremendously in 2008

US Bureau of Economic Analysis

Highest Quintile

Fourth Quintile

Third Quintile

Second Quintile

Lowest Quintile

Far West0.6

Rocky Mountain2.2

Southwest1.7

Plains2.0 Great Lakes

-0.4

New England1.0

Mideast1.3

Southeast0.0

US = 0.7

WA2.0

OR1.6

CA0.4

NV-0.6

ID0.0

MT1.8

WY4.4

UT1.4 CO

2.9

AZ-0.6 NM

2.0

TX2.0

OK2.7

KS2.2

NE1.3

SD3.5

ND7.3 MN

2.0

IA2.1

MO1.3

WI0.7

IL0.3

MI-1.5

IN-0.6

OH-0.7

NY1.6

PA1.1

NJ0.6

MD1.3

DE-1.6

DC3.0VA

1.3

WV2.5

KY-0.1

NC0.1

SC0.6

TN0.5

AR0.7

LA0.3

MS1.7

AL0.7

GA-0.6

FL-1.6

AK-2.0

HI0.7

ME1.4

NH1.8

VT1.7 MA

1.9

RI-0.9CT

-0.4

Mountain, Plains States Growing the Fastest

Percent Change in Real GDP by State, 2007–2008

Page 7: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

9

Fastest Growing States in 2008:Plains, Mountain States Lead

2.1% 2.0%

7.3%

4.4%

3.5%2.9% 2.7% 2.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

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

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

Real State GDP Growth (%)

Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas

Page 8: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

10

Slowest Growing States in 2008: Diversity of States Suffering

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

States in the North, South, East and West All Represented Among Hardest Hit, But for Differing Reasons

Real State GDP Growth (%)

-0.9%

-1.5%-1.6% -1.6%

-1.7%

-2.0%

-0.1%

-0.4%-0.6% -0.6% -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

Page 9: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

11

Labor Market Trends

Fast & Furious:Massive Job Losses Sap the

Economy and Commercial/Personal Lines Exposure

Page 10: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

13

Unemployment and UnderemploymentRates: Rocketing Up in 2008-09

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

10.1% Oct 2009 unemployment rate (U-3) was

the highest monthly rate since 1983.

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

Dec 1982

Stood at 9.7% as of Jan. 2010

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

U-6 went from 9.2% in April

2008 to 17.4% in Oct . 2009.

Stood at 16.5% as of Jan. 2010

January 2000 through January 2010, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Page 11: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

16

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

10.9

10.3

10.110

.6

10.7

10.9

9.5

9.19.4

9.09.

6

9.0

9.19.

9

11.812

.4

11.0

11.0

11.1

11.212

.113.0

12.9

12.6

14.6

0

2

4

6

8

10

12

14

16

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

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for December 2009, seasonally adjusted.

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

The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are

doing much better than others.

Page 12: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

17

6.9

6.9

6.7

6.6

6.66.

97.5

7.5

4.7

4.7

6.67.

07.4

4.4

6.7

8.38.

7

7.5

7.57.78.

3

8.38.

9

8.9

8.89.0

0

2

4

6

8

10

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

Une

mpl

oym

ent R

ate

(%)

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

*Provisional figures for December 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are

doing much better than others.

Page 13: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

18

US Unemployment Rate

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

10

.2%

10

.0%

9.9

%

9.5

%

9.3

%

9.1

%

8.9

%

9.7

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

Rising unemployment is eroding payrolls

and workers comp’s exposure base.

Unemployment is expected to peak above

10% in early 2010.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/10); Insurance Information Institute

2007:Q1 to 2011:Q4F*

Page 14: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

19

Monthly Change Employment*-7

2

-14

4

-12

2

-16

0

-13

7

-16

1

-12

8

-17

5

-32

1

-38

0

-59

7

-68

1

-77

9

-72

6

-75

3

-58

2

-34

7

-50

4

-34

4 -21

1

-22

5

-22

4

64

-15

0

-20

-900

-800

-700

-600

-500

-400-300

-200

-100

0

100

200

Jan

08

Fe

b 0

8

Ma

r 0

8

Ap

r 0

8

Ma

y 0

8

Jun

08

Jul 0

8

Au

g 0

8

Se

p 0

8

Oct

08

No

v 0

8

De

c 0

8

Jan

09

Fe

b 0

9

Ma

r 0

9

Ap

r 0

9

Ma

y 0

9

Jun

09

Jul 0

9

Au

g 0

9

Se

p 0

9

Oct

09

No

v 0

9

De

c 0

9

De

c 0

9

Monthly Losses in Dec–May Were the Largest in the Post-WW II Period but

Pace of Loss is Diminishing

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

Job Losses Since the Recession Began in Dec. 2007 Total 8.4 Million; 14.8 Million People are Now Defined as Unemployed

January 2008 through January 2010 (Thousands)

December’s loss of 20,000 jobs was a

disappointment, but labor market recoveries

are often erratic.

Page 15: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

21

US Nonfarm Private Employment1

38

.0

13

8.1

13

8.0

13

7.9

13

7.8

13

7.8

13

7.7

13

7.6

13

7.6

13

7.4

13

7.0

13

6.7

13

6.2

13

5.1

13

3.5

13

2.8

13

2.1

13

1.5

13

1.1

13

0.6

13

0.3

13

0.1

12

9.9

12

9.6

12

9.7

12

9.5

12

9.5

129130131132133134135136137138139

No

v 0

7

De

c 0

7

Jan

08

Fe

b 0

8

Ma

r 0

8

Ap

r 0

8

Ma

y 0

8

Jun

e 0

8

Jul 0

8

Au

g 0

8

Se

p 0

8

Oct

08

No

v 0

8

De

c 0

8

Jan

09

Fe

b 0

9

Ma

r 0

9

Ap

r 0

9

Ma

y 0

9

Jun

09

Jul 0

9

Au

g 0

9

Se

p 0

9

Oct

09

No

v 0

9

De

c 0

9

Jan

10

Monthly, Nov 07 – Jan 10 (Millions)

The US Economy Lost About 8.4 Million Jobs in

Just Over 2 Years

Employment Peak; Recession Starts

Seasonally adjusted. Source: US Bureau of Labor Statistics

Page 16: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

23

Unemployment and Educational Attainment: More Education = Less Unemployment

17.6%

11.5%10.0%

7.3%

5.1%

14.4%

9.3%7.5%

5.7%4.1%

0%2%

4%6%8%

10%

12%14%16%

18%20%

Less than HSDiploma

HS Graduate Some College, No Degree

Associate Degree Bachelor'sDegree or Higher

Jan. 2009 Unemployment Rate

Jan. 2010 Unemployment Rate

Source: US Bureau of Labor Statistics accessed at ftp://ftp.bls.gov/pub/suppl/empsit.cpseea17.txt .

Unemployment Rate (%), January 2009 vs. January 2010

A Higher (Record) Proportion of WC Exposure Base is Associated With Employment of Women

Page 17: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

24

Unemployment Rate by Gender: The “Mancession” Can Impact Exposure Too

15.3%

9.0% 8.7%

5.8%4.9%

18.9%

13.4%

11.0%9.2%

5.3%

0%2%

4%6%8%

10%

12%14%16%

18%20%

Less than HSDiploma

HS Graduate Some College, No Degree

Associate Degree Bachelor'sDegree or Higher

Men Women

Source: US Bureau of Labor Statistics accessed at ftp://ftp.bls.gov/pub/suppl/empsit.cpseea17.txt .

Unemployment Rate (%), January 2010

Higher Male Unemployment Rate Has Had a Significant Impact on WC and Specialty Personal Lines (e.g., watercraft, RVs, campers, motorcycles,

snowmobiles, etc.)

Page 18: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

25

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

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

* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessionsSource: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books

Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums

7/90-3/91 3/01-11/01 12/07-?

$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

$45

Wage & SalaryDisbursements

WC NPW

Page 19: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

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

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

-4.4%

-2.0%-1.1%

1.1%

3.7%4.6%

8.5%

3.5%

2.1%

-0.5%

-3.6%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

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

because of continued wage inflation, a factor not present

during the 2007-2009 recession

The Dec. 2007 to mid-2009 recession

caused the largest impact on WC

exposure in 60 years

(Percent Change)

(All Post WWII Recessions)

Recession Dates (Beginning/Ending Years)

Page 20: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

27

Frequency: 1926–2008A Long-Term Drift Downward

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

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

0

5

10

15

20

25

30

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

Page 21: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

30

When Might All of the Lost JobsBe Regained? 2016?

Source: Wall Street Journal, October 9, 2009, p. A3

Page 22: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Crisis-Driven Exposure Drivers

31

Economic Obstaclesto Growth in P/C Insurance

Page 23: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

32

(Millions of Units)

New Private Housing Starts, 1990-2011F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

0

0.5

6 0.7

1

0.9

6

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

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

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/10); Insurance Information Institute.

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

Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged 34% from 2005-2007; drop through 2009 is 72% (est.); A net annual decline of 1.49 million units,

lowest since records began

in 1959

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

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

estimated at about $1.3 billion

Page 24: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Average Square Footage of Completed New Homes in U.S., 1973-2010:Q4

1,66

01,

695

1,64

51,

700

1,72

01,

755

1,76

01,

740

1,72

01,

710

1,72

51,

780

1,78

51,

825 1,90

5 1,99

52,

035

2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12

02,

150

2,19

02,

223

2,26

62,

324

2,32

02,

330

2,34

9 2,43

42,

469

2,52

12,

519

2,56

12,

492

2,32

72,41

7

1,500

1,700

1,900

2,100

2,300

2,500

2,700

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 0809

:Q1

09:Q

209

:Q3

09:Q

4

Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.

Square FtThe trend to building larger homes

reversed in 2008-09, impacting exposure growth beyond the

absolute decline in units

Average size of completed new homes often falls in recessions

(yellow bars), but historically bounces back in expansions

33

Page 25: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

35

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

,000

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

Business Bankruptcy Filings,1980-2009*

*2009 is annualized estimate based on actual business bankruptcies in first three quarters of 2009Source: American Bankruptcy Institute,http://www.abiworld.org/AM/Template.cfm?Section=Business_Bankruptcy_Filings1&Template=/TaggedPage/TaggedPageDisplay.cfm&TPLID=59&ContentID=36301.

Significant Implications for all Commercial Lines

There were 45,510 business bankruptcies during the first three quarters of 2009, up 52% from 2008:Q3 and

on track for about 60,000 for all of 2009, the most since 1993. Current recession will generate 200%+ surge

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 204.2%*

Page 26: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

37

Private Sector Business Starts,1993:Q2 – 2009:Q1*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

199

191 19

317

1

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

Business Starts Are Down 18% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure

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

(Thousands)

171,000 businesses started in 2009:Q1, the lowest level

since 1993

Page 27: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

38

Total Industrial Production

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/10); Insurance Information Institute

-9.0%

-13.0%

-19.0%

-10.4%

6.9% 7.0%5.3% 4.7% 4.5% 4.5% 4.2% 4.1% 4.2% 3.8%

1.5%3.2% 3.6%

0.3% 0.2%

-4.6%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

End of Recession in mid-2009, Stimulus Program Are Benefiting Industrial Production and Therefore Insurance Exposure Both

Directly and Indirectly, Albeit Very Modestly

2007:Q1 to 2011:Q4F (%)

Industrial Production is Aided by a Rebuild of Inventories, Gradual Economic Recovery

and Stimulus Program (Q2:09 through 2010)

Industrial Production Began to Contract Sharply in Late 2008 and Plunged

in 2009:Q1

Page 28: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

40

Year-Over-Year Change in Quarterly USState Tax Revenues, Inflation Adjusted

Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2010-01-07-SRR_78.pdf

2.4

%4

.7%

5.6

% 9.9

%9

.5%

4.4

%1

.8%

0.4

%-1

.3%

-1.7

%-3

.0%

-7.6

%-1

0.7

%0

.0%

1.6

%-0

.6%

0.1

% 4.0

%4

.7%

5.7

% 8.2

%3

.4% 6.0

%7

.0%

12

.4%

6.6

%4

.2%

3.7

% 6.3

%2

.6%

1.3

%1

.9%

2.3

%0

.4%

0.8

%0

.4% 3.0

%0

.2%

-5.8

%

-10

.9%

-17

.6%

-13

.3%

2.4

%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1Q

99

3Q

99

1Q

00

3Q

00

1Q

01

3Q

01

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

States Revenues Were Down 10.9% in Q3 2009, the Second Consecutive Quarter of Record Revenue Decline. This Will Impact Public Infrastructure

Spending Significantly.

Nationwide, state-tax collections for fiscal year 2009 declined by a record

$63 billion, or 8.2 percent from the previous year. That loss is roughly twice the amount states gained in fiscal relief

from the federal stimulus package

Page 29: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

45

Green Shoots

The Recession May Have Ended, but Is it

Self-Sustaining?

Page 30: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

46

Hopeful Signs That the Economic Recovery is Underway

Recession appears to have bottomed out, freefall has ended GDP shrinkage has ended; Economy is expanding Pace of job losses is slowing, despite setbacks 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 very credit worthy people

and businesses

Housing sector seems to be bottoming out 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 and energy prices are under control

Consumer and business debt loads are shrinking

Source: Insurance Information Institute.

Page 31: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

47

11 Industries for the Next 10 Years: Insurance Solutions Needed

Government

Education

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology

Light Manufacturing

Export-Oriented Industries

Page 32: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

48

Mounting Pressure on Claim Cost Severities?

Inflation Trends:Concerns Over Stimulus Spending

and Monetary Policy

Page 33: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

49

Annual Inflation Rates(CPI-U, %), 1990–2011F

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

2.2 2.0

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 10F11F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Feb. 10, 2010 (forecasts).

There is So Much Slack in the US Economy That Inflation Should Not Be a Concern Through 2010/11, but Depreciation of Dollar is Concern Longer Run

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 have reduced inflationary pressures

Page 34: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests

Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.

-0.4%

2.7% 3.0% 3.1%3.8%

4.3%

5.5%6.2%

-2%

0%

2%

4%

6%

8%

OverallCPI

LegalServices

US TortCosts

MedicalCare

MotorVehicleBodyWork

BodilyInjury

Severity

WC MedSeverity

No-FaultClaim

Severity

(Percent)

Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely

50

Page 35: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E*

0%

2%

4%

6%

8%

10%

12%

14%

1961-70 1971-80 1981-90 1991-2000 2001-09E

Tort Costs Medical Costs CPI

* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.

Tort system is an inflation amplifier

Avg. Ann. Change: 1961-2009E*

Tort costs: +8.4%Med costs: +5.9%

Overall inflation: +4.2%

Source: U.S. Bureau of Labor Statistics; Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; I.I.I.

Tort costs move with inflation but at twice the rate of inflation

Are there healthcare reform spillover effects?

Page 36: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

53

Key Threats Facing Insurers Amid Financial Crisis

Challenges for theNext 5-8 Years

Page 37: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

56

Important Issues & Threats Facing Insurers: 2010–2015

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

3 Long-Term Reduction in Investment Earnings

Source: Insurance Information Institute.

Page 38: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

57

Important Issues & Threats Facing Insurers: 2010–2???

Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)

Systemic Risk Regulator (Too Big To Fail) Is any insurer systemically important?

Federal Insurance Office Creation Within Treasury? Eventual “mission creep”?; Activist director?

Consumer Financial Protection Agency Will it be limited to banks/creditors

Federal Trade Commission: All Lines Study Authority? McCarran-Ferguson Rollback

Will it be limited to Health/Med Mal lines? OFC/State Regulation Debate Lingers Taxation/Offshore Domiciles

4 Regulatory Overreach

Bottom Line: Regulatory Outcome is Uncertain and Risk of Adverse Outcome Exists. Ultimate Regulation Structure Will Be in Place for Decades

Source: Insurance Information Institute.

Page 39: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

62

Important Issues & Threats Facing Insurers: 2010–2015

Source: Insurance Information Institute

Bottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012–2014

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 liability

Historically extremely costly to p/c insurance industry

Leads to reserve deficiency, rate pressure

5 Emerging Tort Threat

Page 40: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

63

Terrorism: Insurance Concerns Resurface

Reasons Why Concerns Are Mounting in 2010

Perception of U.S. vulnerability is rising Thwarted Christmas Day attack by “underwear bomber”

And new bin Laden tape claiming al Qaeda is responsible Increased anti-terror efforts, including full-body scans Effort by government to appear more vigilant, prepared Trials of Guantanamo 9/11 suspects in Manhattan Court

NYC says it will need $200+ million each year for security Obama Administrations Intent to Reduce Support for TRIA Rise of groups such al Qaeda in the Arabian Peninsula U.S. military surge in Afghanistan operations Most buyers, producers have not thought about coverage

issues recently U.K. in January Raised Terror Alert Status to 2nd Highest Level

Page 41: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Shifting Legal Liability & Tort Environment

64

Is the Tort PendulumSwinging Against Insurers?

Page 42: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

65

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 08E 10E

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)

* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

2009–2010 Growth in Tort Costs as % of GDP is Due in

Part to Shrinking GDP

Page 43: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

66

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

New MexicoAppellate

Courts

Watch List

California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley,

TX

Dishonorable Mention

AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme

Judicial Court Sacramento County

New JerseyAtlantic County (Atlantic City)

New York City

Page 44: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Financial Strength & Ratings

67

Industry Has Weathered the Storms Well

Page 45: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

P/C Insurer Impairments, 1969–2009p8

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

71

1

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

p

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

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

5 of the 11 are Florida companies (1 of these

5 is a title insurer)

Page 46: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

70

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009

3.8%

2.9%3.2%

2.4%

11.9%75.7%

.Source: A.M. Best.

P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses

Are Anticipated in the Industry’s Risk Management Strategy

Despite financial market turmoil and a soft market

in 2009, 76% of ratings actions by A.M. Best were affirmations;

just 2.9% were downgrades and 3.2%

were upgrades

Affirm – 1,375

Downgraded – 53

Upgraded – 59Initial – 44

Under Review – 69

Other – 216

Page 47: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

72

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

3.7%4.2%

9.1%

7.0%

7.9%

7.6%

8.1% 14.3%

38.1%

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

Deficient Loss Reserves/In-adequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

Page 48: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

P/C Insurance Financial Performance

76

A Resilient Industry in Challenging Times

Page 49: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

P/C Net Income After Taxes1991–2009P ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$2

,37

9

$3

0,6

00

-$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 09P

2005 ROE*= 9.4% 2006 ROE = 12.2% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009:Q3 ROAS1 = 4.5%

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 4.5% ROAS for 2008 and 5.9% for the first 9 months of 2009. 2009:Q3 net income was $20.5 billion excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry profits for full-year 2009 were up sharply from 2008, but are still well

below pre-crisis levels

Page 50: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

79

ROE: P/C vs. AllIndustries1987–2009:Q3*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009 through Q3.Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09:Q3

US P/C Insurers All US Industries

P/C Profitability isCyclical and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Page 51: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

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

Combined Ratio / ROE

* 2009 figure is return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guarantee insurersSource: Insurance Information Institute from A.M. Best and ISO data

97.5

100.6 100.1 100.7

92.6

99.5101.0

5.9%

9.6%

15.9%

14.3%

12.7%

4.5%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009:Q30%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

Combined ratio of about 100 generated a 6% ROE in 2009, 10%

in 2005 and16% in 1979

Page 52: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

P/C Premium Growth Primarily Driven by the

Industry’s Underwriting Cycle, Not the Economy

82

Page 53: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

83

-10%

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

F

Strength of Recent HardMarkets by NWP Growth

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

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute

Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33

During the Great Depression. Expected decline of 1.6% in 2010.

Page 54: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

84

Average Commercial Rate Change,All Lines, (1Q:2004–4Q: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% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-6.0

%

-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

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

KRW Effect

Magnitude of Price Declines Shrank

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

Performance, Higher Cat Losses and

Costlier Reinsurance

(Percent)

Market Remains Soft as Capital Restored and Underwriting Losses Fall

Page 55: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Capital/PolicyholderSurplus (US)

87

Shrinkage, but Not Enoughto Trigger Hard Market

Page 56: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

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

US Policyholder Surplus:1975–2009:Q3*

* As of 9/30/09Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.87:$1 as of9/30/09, Up from Near Record Low of $0.85:$1 at Year-End 2007

Surplus as of 9/30/09 was $490.8B, up from $437.1B as of 3/31/09. Recent peak was $521.8 as of 9/30/07. Surplus as of 9/30/09 is now only 5.9% below 2007 peak; Crisis trough was as of

3/31/0916.2% below 2007 peak.

Page 57: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

90

Policyholder Surplus, 2006:Q4–2009:Q4P

Source: ISO, AM Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$519.3$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 09:Q3 09:Q4P

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

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%)09:Q3: -$31.8B (-5.9%)09:Q4: -$2.5B (-0.5%)

Capacity as of 12/31/09 was just 0.5% below the 2007 peak and will likely set a new record in 2010

Page 58: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

91

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

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

3.3%

9.6%

6.9%

10.9%

6.2%

13.8%

16.2%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Overthe Past 20+ Years

(Percent)

Page 59: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Investment Performance

93

Investments Are a PrincipleSource of Declining Profitability

Page 60: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Property/Casualty Insurance Industry Investment Gain: 1994–2009P1

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.4$35.1

$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 09P

Investment Gains Fell by 51% In 2008 Due to Lower Yields,Poor Equity Market Conditions. In 2009, the Return of Realized Capital

Losses Helped Offset Lower Investment Income

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)

Page 61: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

99

Underwriting Trends – Financial Crisis Does Not

Directly Impact Underwriting Performance: Cycle, Catastrophes

Were 2008’s Drivers

Page 62: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

100

P/C Insurance Industry Combined Ratio, 2001–2009:Q3*

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

95.7

99.5101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009:Q3*

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

2005 Ratio Benefited from Heavy Use of Reinsurance

Which Lowered Net Losses

Page 63: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Commercial Multi-Peril Combined Ratio: 1995–2010P

11

9.0

11

9.8

10

8.5

12

5.0

11

6.2

11

6.1

10

4.9

10

1.9

10

5.4

95

.1 97

.610

0.7

11

6.8

11

3.6

11

5.3

12

2.4

11

5.0

11

7.0

97

.3

89

.0

97

.7

93

.8

83

.8

89

.8

10

8.0

97

.0 99

.5

11

3.1

11

5.0 1

21

.0

80

85

90

95

100

105

110

115

120

125

130

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

Commercial Multi-Peril is Expected to Continue to Perform Reasonably Well

*2009E and 2010P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.

Page 64: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Commercial Auto Combined Ratio: 1993–2010P

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4 94

.2 96

.8

97

.0

98

.5

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 09E 10P

Commercial Auto is Expected to Remain Reasonably Profitable in 2010

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

Page 65: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Inland Marine Combined Ratio: 1999–2010P

101.9

92.8

100.2

83.8

77.379.5

93.2

86.088.5

80.882.5

89.9

70

75

80

85

90

95

100

105

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

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

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

Page 66: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

Workers Compensation Combined Ratio: 1994–2010P

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

3.5

10

4.3 1

09

.0

11

2.0

121.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

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

Workers Comp Underwriting Results Are Deteriorating Markedly

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

Page 67: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

107

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

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

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

-3.1%-3.3%-3.3%-3.7%

-4.3%

-5.2%-5.7%

-7.3%

-1.8%-1.8%-2.0%

-3.6%

-1.9%-2.1%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

Page 68: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

108

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 Will Expected to Taper Off in 2010 and Drop Significantly 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.

Page 69: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

109

Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1

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.

10

5.6

10

7.8

11

0.1 1

15

.9

10

7.3

10

0.1

98

.3 10

0.9

92

.4 95

.5

10

5.1

10

1.9 10

5.9

11

5.7

10

6.9

10

8.4

10

6.4

10

5.8

10

1.6 10

5.6

10

7.8

11

0.0

11

2.3

10

0.8

96

.6

96

.0

10

0.6

93

.9 97

.4

10

5.5

10

5.7 10

9.4

11

5.7

10

6.9

10

8.4

10

6.4

10

5.8

10

1.6

80

85

90

95

100

105

110

115

120

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

Calendar Year Accident Year

Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases

Page 70: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

112

Performance by Segment:Commercial/Personal Lines &

Reinsurance

Page 71: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

113

Calendar Year Combined Ratios by Segment: 2008-2010P

Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.

101.0 101.2

92.2

100.3

103.7

100.599.8

107.2

103.6

9092949698

100102104106108110

Personal Lines Commercial Lines US Reinsurance

2008 2009E 2010P

Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

performance related to the prolonged commercial soft market

Personal lines combined ratio is expected to improve in 2010 while commercial lines

and reinsurance deteriorate

Page 72: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

115

After-Tax Return on Surplus (ROE) by Segment: 2008-2010P

Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.

5.3%

7.3%

5.2%

6.6%7.1%

5.3%

3.9%

-1.3%

1.7%

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

Personal Lines Commercial Lines Reinsurance

2008 2009E 2010P

Profitability will rise or stabilize across most p/c lines, barring a financial crisis relapse or major catastrophic losses

Personal lines ROEs should improve in 2010 and remain flat in commercial lines and

reinsurance

Page 73: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

117

Net Written Premium Growth by Segment: 2008-2010P

Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.

-1.1%

-7.9%

-1.5%

1.8%

-5.6%

-2.0%

3.5%

-4.0%

-0.7%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Personal Lines Commercial Lines Reinsurance

2008 2009E 2010P

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample

capacity are holding down reinsurance prices while higher insurer retentions impact premiums

Personal lines will return to growth in 2010 while commercial lines and reinsurance are

expected to continue to shrink

Page 74: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

120

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

Page 75: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

121

$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

6.0

$1

0.6

$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*20??

US Insured Catastrophe Losses

* 2009 figure is Munich Re estimate.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.

2009 CAT Losses Were Less than Half of 2008. 2005 Was by Far the Worst Year Ever for Insured Catastrophe

Losses in the Decade of the 2000s Were More than Double the 1990s, But the Worst Has Yet to Come

$100 Billion CAT Year is Coming Eventually

2009 CAT Losses

Were Down 48% though

Q3 from $21.1B 2008

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

Page 76: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

122

$2,458.0

$1,319.0

$821.9 $776.9$604.5

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Texas Colorado Georgia Kentucky Oklahomo

States with Highest Insured Catastrophe Losses in 2009

($ Millions)

US insured catastrophe

losses totaled $10.57 billion

from 28 events in 2009, down from

$26 billion in 2008.

*As of February 22, 2010.Source: PCS/ISO

Texas led the US with $2.458 billion in catastrophe losses

in 2009 even with no hurricanes hitting the state. Texas also led the US with

$10.2 billion in insured in 2008 due largely to Hurricane Ike.

Page 77: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

50

100

150

200

250

300

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

Global Natural Catastrophes 1980–2009Overall and insured losses with trend

US

$bn

Overall losses (in 2009 values) Insured losses (in 2009 values)

Trend insured lossesTrend overall losses

Source: Munich Re NatCatSERVICE; Insurance Information Institute.

MEGATREND

Global natural catastrophe loss trends are ominous and

portend an even more disastrous decade ahead. Terrorism and other man-

made disasters could exacerbate the trend.

Page 78: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

130

Top 12 Most Costly Disastersin US History

(Insured Losses, 2008, $ Billions)

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

$11.3 $11.3 $12.5

$22.8 $23.8

$45.3

$8.5$8.1$7.3$6.2$5.2$4.2

$0$5

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

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Northridge(1994)

Ike(2008)*

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

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

8 of the Top 12 Disasters Affected FL

In 2008, Ike Became the 4th Most Expensive Insurance Event and 3rd Most Expensive

Hurricane in US History Arising from About 1.35MM Claims

Page 79: The Commercial P/C Insurance Industry in the Aftermath of the “Great Recession” National Association of Mutual Insurance Companies Commercial Lines Underwriting

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