RIMS 2008

2012 Casualty Market OverviewA Tale of Two MarketsThe State of The US Casualty MarketPresented By:Anthony DeFelice

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It was the Best of Times, It was the Worst of Times1

12Industry Experts Weigh InIt was the Worst of Times Theres no question that the market turn is definitive. It is here. William R. BerkleyInsurance Industry leaders believe the worst of the financial crisis now behind us; Industry now in the early stages of a hard market. Insurance Information InstituteThe signs all point to an industry awareness that the risk being assumed needs more rate to produce adequate returns. Aspen Re

23Industry Experts Weigh InIt was the Best of TimesPositive premium rate movement remains in an early stage, but market competition remains fierce. Fitch December 2011The company remains skeptical that a long term reversal in market pricing has arrived. A.M. BestAs far as a hard market, we are not quite there yet, I think were still a year or two out. A.M. Best

32012 State of the Market?Brittle?

Hardening?

Tightening?

Firming?

Transitioning?

One Word Can not capture the Dynamics of the Market

44A Tale of Two MarketsIncumbent BusinessNew BusinessvsGuaranteed CostHigh DeductiblevsLead UmbrellaExcess LimitsvsHigh Hazard RisksLow - Moderate Hazard RisksvsDifficult Loss HistoryFavorable Loss HistoryMarkets with Legacy IssuesNew Market Capacityvsvs556Casualty Market Engine Difficult StartingView Related Article

6Casualty Recap 20119th year of soft casualty pricingMany years producing double digit reductionsRate reductions slowed following Financial CrisisExposures increasingEnd of 2011beginning sees upward movement (rate) in the aggregate7Lets review Industry Issues7

Market BalanceRecord Policy Holder SurplusMarket CompetitionRising Combined RatiosLagging Investment ResultsSlowing Reserve ReleasesRising Tort CostsEconomic Pressures

Rate Increases

88POLICY HOLDERSURPLUS99Policyholder Surplus, 2006:Q42012:Q1Sources: A.M .Best; ISO; Insurance Information Institute Graph.($ Billions)

2011:Q1Previous Surplus PeakQuarterly Surplus Changes Since 2011:Q1 Peak11:Q2: -$7.4B (-1.0%)11:Q3: -$27.9B (-4.6%)11:Q4: -$16.2B (-2.5%)12:Q1: +$3.2B (+0.7%)

Surplus as of 3/31/12 hit an all time record high of $570.7B, 0.7% or $3.2B above the previous record set as of 3/31/11.* Includes $22.5B of paid-in capital from a holding company parent for one insurers investment in a non-insurance business in early 2010.The Industry now has $1 of surplus for every $0.80 of NPW, close to the strongest claims-paying status in its history.Drop due to near-record 2011 CAT losses1010MARKET COMPETITIONRECORD CAPACITY

Approximately $2.5 Billion of Available Capacity

$1.3 Billion available on Single Risk Through Traditional Sources

Ample Capacity for 98% of Corporate Risks

Class 1 Rails, Energy, Multi-National Conglomerates, Large Life Science, are exceptions1111RISING COMBINED RATIOS1212Underwriting Gain (Loss)19752012:Q1** Includes mortgage and financial guaranty insurers in all years.Sources: A.M. Best; ISO; Insurance Information Institute Graph.Large Underwriting Losses Are NOT Sustainable Current Investment Environment

Cumulative underwriting deficit from 1975 through 2011 is $479B($ Billions)Underwriting losses in 2011 totaled $36.5B, the largest since 20011313General Liability Combined Ratio: 20052012F

Commercial General Liability Underwriting Performance Has Deteriorated in Recent YearsSources: Conning Research and Consulting; Insurance Information Institute Graph.1414Other & Products Liability Combined Ratio: 19912012F

Liability Lines Have Performed Better in the Post-Tort Reform Era (~2005), but There Has Been Some Deterioration in Recent YearsSources: A.M. Best; Insurance Information Institute Graph.1515Commercial Auto Combined Ratio: 19932012F

Commercial Auto is Expected to Deteriorate as Loss Frequency and Severity Trends Deteriorate 2011-2012Sources: A.M. Best; Insurance Information Institute Graph.1616Workers Compensation Combined Ratio: 19942012F

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They Have Been in a DecadeSources: A.M. Best; Insurance Information Institute Graph.17Another Look at Combined Ratios18* Excludes Mortgage & Financial Guarantee LossesYear* PublishedCombinedReserve Release EffectCombined Without Reserve ReleaseCAT EffectCombined Without Noise

200692.7-294.7+2.792200795.7-398.7+1.697.12008101.0-4.25105.3+5.0100.3200999.3-5104.3+2.6101.72010100.9-4.25105.2+4.4100.82011 (est)106.4-1.8108.2+8.0100.218LAGGING INVESTMENT RETURNS1919Treasury Yield Curves: Pre-Crisis (July 2007) vs. August 2012

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 2014 at the earliest.The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through Mid-2015; This Adds to Pricing Pressure for Insurers.Source: Federal Reserve Board of Governors; Insurance Information Institute Graph.2020Property/Casualty Insurance Industry Investment Income: 20002012F1

Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized Q1:2012 actual figure of $11.656B.Sources: ISO; Conning Research & Consulting; Insurance Information Institute Graph.($ Billions)Investment earnings in 2011 were 10.3% below their 2007 pre-crisis peak21P/C Net Income After Taxes19912012:Q1 ($ Millions)

2005 ROE*= 9.6%2006 ROE = 12.7%2007 ROE = 10.9%2008 ROE = 0.1%2009 ROE = 5.0%2010 ROE = 6.6%2011 ROAS1 = 3.5%2012:Q1 ROAS1 = 7.2%P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best; ISO; Insurance Information Institute Graph.2222A 100 Combined Ratio Isnt What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Sources: A.M. Best; ISO; Insurance Information Institute Graph.

Combined Ratios Must Be Lower in Todays Depressed Investment Environment to Generate Risk Appropriate ROEsA combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,10% in 2005 and 16% in 1979Year Ago2011:Q1 = 102.2, 6.1% ROE2323

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySources: A.M. Best; Insurance Information Institute Graph.Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*2424This shows the drop in Combined Ratio for each line of business that would be needed to maintain a constant ROE, given a 1-percentage-point drop in investment yieldSLOWING RESERVE RELEASES252512/01/09 - 9pm

P/C Reserve Development, 19922013FReserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to Further Diminish in 2012 and 2103Note: 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: Barclays Capital; A.M. Best; Insurance Information Institute Graph.Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from $7.1 billion in the first half of 20092626RISING TORT COSTS2727

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2929#1 Texas$482M Patent Infringement#2 Mississippi$322M Product/Asbestos#3 Virginia$212M Product#4 Nevada $183M Product#5 Michigan$144M Medical Malpractice #6 Texas $116M Fraud#7 Nevada $104M Product#8 Illinois $95M Sexual Harassment#9 West Virginia $91M Nursing Home#10 Illinois $90M ProductTop 10 Verdicts 2011Source: Lawyers USA Weekly303031Top Ten Jury VerdictsIn 2011, the average size of top ten verdicts rose by $27 Million or 17% to $184 MillionIn 2011, the lowest award in the top 10 is nearly $90 Million - $10 Million more than 2010In 2011 the top award was $482 Million, slightly lower than the $505 Million figure for 2010The Total of the largest five liability verdicts was $1.1 Billion in 2010, up 77% from 2009 which was up 52% from 2008 Bloomberg

Source: Top 10 Jury Verdicts of 2011. Lawyers USA. 17 January 201131Medical Cost Inflation Has Outpaced Overall Inflation For Over 50 Years

Sources: Department of Labor (Bureau of Labor Statistics); Insurance Information Institute Graph.A claim that cost $1,000 in 1961 would cost nearly $17,500 based on medical cost inflation trends over the past 51 years. 3232AON GRIP DATA CIAB DATA333334Aon Grip Data Risk Management AccountsPrimary Casualty Quarterly Year-Over-Year Change in Average Rate

Data Source: Aon Analytics Research and Aon GRIPSM34Aon Grip Data Risk Management AccountsUmbrella/Excess Liability Quarterly Year-Over-Year Change in Average Rate

Data Source: Aon Analytics Research and Aon GRIPSM3535Change in Commercial Rate Renewals, by Line: 2012:Q2Sources: Council of Insurance Agents and Brokers; Insurance Information Institute Graph.Major Commercial Lines Renewed Uniformly Upward in Q2:2012 for Only the Fourth time Since 2003; Property Lines & Workers Comp Leading the Way; Cat Losses and Low Interest Rates Provide Momentum Going ForwardPercentage Change (%)

Workers Comp rate increases are large than any other line, followed by Property lines363637

Storm Clouds on the Horizon?Will Industry Surplus Begin to Decline?Will Combined Ratios in Casually Lines Continue to Increase?How will the Global Economy react in 2012?Will Social Inflation continue to impact the Tort System?Will reserve releases turn to reserve strengthening?3737