Overview & Outlook for the Commercial P/C Insurance

IndustryTrends, Challenges & Opportunities

Target Markets Mid-Year Conference Atlanta, GAMay 6, 2015

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

Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Insurance Industry:Financial Update & Outlook

2014 Was a Reasonably Good Year2015: A Repeat of 2014?

2

P/C Industry Net Income After Taxes1991–2014 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 ROAS1 = 5.9% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

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

$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

5,2

04

$1

9,4

56 $

33

,52

2

$6

3,7

84

$5

5,5

01

$3

8,5

01

$2

0,5

59

$4

4,1

55

$6

5,7

77

-$6,970

$2

8,6

72

-$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 12 13 14

Net income fell modestly

(-12.5%) in 2014 vs. 2013

$ Millions

-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

12

13

14

15

F1

6F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016F

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning

1977:19.0%1987:17.3%

1997:11.6% 2006:12.7%

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

10 Years

10 Years

9 Years

History suggests next ROE peak will be in 2016-2017, but that seems unlikely

ROE

1975: 2.4%

2013 9.8%

2014 8.2%

2015F=6.5%

2016F=6.3%

6

ROE: Property/Casualty Insurance by Major Event, 1987–2014

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 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 10 11 12 13 14*

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Modestly higher CATs

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998.Source: A.M. Best; Insurance Information Institute.

Economic Shocks, Inflation:

1976: 22.0%

Tort Crisis1985/86: 22.2%

Post-9/112002:15.3%

Twin Recessions; Interest Rate

Hikes1987: 3.7% Great

Recession:2010: -4.9%

ROE

2014 4.1%

NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2014

Great Depression1932: -15.9% max drop

Post WW II Peak:1947: 26.2%

Start of WW II1941: 15.8%

1950-70: Extended period of stability in growth and

profitability. Low interest rates, low inflation, “Bureau”

rate regulation all played a role

1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic

volatility, high interest rates, tort environment all played roles

1988-2000: Period of

inter-cycle stability

2010-20XX? Post-

recession period of

stable growth?

9

P/C Insurance Industry Combined Ratio, 2001–2014*

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.7 97.2

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 2012 2013 2014

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

PremiumsRelatively Low CAT Losses, Reserve Releases

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

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

Best Combined

Ratio Since 1949 (87.6)

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014 combined ratio including M&FG insurers is 97.0; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

96.7 97.2

102.4

106.5

95.7

14.3%

15.9%

12.7%

10.9%

7.4% 7.9%

4.7%6.2%

8.2%9.6%

8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014: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

A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Lower CATs helped ROEs

in 2013

11

Return on Net Worth (RNW) All Lines:2004-2013 Average

25

.6

18

.4

13

.4

13

.2

9.2

8.9

7.9

7.8

7.1

7.1

6.6

4.9

-1.0

-5

0

5

10

15

20

25

30

Fire

Inla

nd Mar

ine

All O

ther

Med

ical

Pro

f Lia

bility

Comm

Auto

Tota

l

Comm

erci

al MP

All Lin

es

Oth

er L

iabili

ty

Work

ers

Comp

PP Auto

Tota

l

Homeow

ners

MP

Farmow

ners

MP

Allied L

ines

Source: NAIC; Insurance Information Institute.

Commercial lines have tended to be more profitable than

personal lines over the past decade

12

RNW All Lines by State, 2004-2013 Average:Highest 25 States

20

.5

18

.4

14

.6

14

.3

13

.4

13

.3

12

.3

12

.1

12

.0

12

.0

11

.7

11

.4

11

.1

11

.1

10

.9

10

.8

10

.7

10

.7

10

.5

10

.5

10

.3

9.9

9.8

9.8

9.6

9.5

02468

1012141618202224

HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

Source: NAIC; Insurance Information Institute.

Profitability Benchmark: All P/C

US: 7.9%

13

9.2

8.6

8.4

8.3

8.2

8.2

8.1

8.0

7.9

7.7

7.7

7.5

7.4

6.8

6.6

6.4

6.1

5.7

5.3

5.2

5.0

4.3

2.5

1.9

-6.9

-9.3

-14-12-10

-8-6-4-202468

10

NM FL TX WI KS MN CO PA US AR IL IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA

RNW All Lines by State, 2004-2013 Average: Lowest 25 States

Source: NAIC; Insurance Information Institute.

Some of the least profitable states over the past decade were hit hard

by catastrophes

INVESTMENTS: THE NEW REALITY

15

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

15

Property/Casualty Insurance Industry Investment Income: 2000–20141

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3$46.2

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.

1 Investment gains consist primarily of interest and stock dividends. *2014 figure is estimated based on annualized data through Q3.Sources: ISO; Insurance Information Institute.

($ Billions) Investment earnings are still below their 2007 pre-crisis peak

Book Yield on Property/Casualty Insurance Invested Assets, 2007–2016F

4.42

4.19

3.95

3.71

3.283.20

3.13

3.74

3.523.38

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

07 08 09 10 11 12 13 14E 15F 16F

The yield on invested assets continues to decline as returns on maturing bonds generally still exceed new money yields. The end of the Fed’s QE program in Oct. 2014 should allow some increase

in longer maturities while short term interest rate increases are unlikely until mid-to-late 2015

Sources: Conning.

(Percent)

Book yield in 2014 is down 114 BP from pre-crisis levels

CAPITAL/CAPACITY

27

Capital Accumulation Has Multiple Impacts

27

28

Policyholder Surplus, 2006:Q4–2014:Q4

Sources: ISO, A.M .Best.

($ Billions)

$487

.1

$496

.6

$512

.8

$521

.8

$478

.5

$455

.6

$437

.1 $463

.0 $490

.8 $511

.5 $540

.7

$530

.5

$544

.8

$559

.2

$559

.1

$538

.6

$550

.3

$567

.8

$583

.5

$586

.9 $607

.7

$614

.0

$624

.4 $653

.4

$671

.6

$673

.9

$674

.7

$662

.0

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

14:Q

3

14:Q

4

2007:Q3Pre-Crisis Peak

Surplus as of 12/31/14 stood at a record high $674.7B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2015in very strong financial condition.

33

Alternative Capital

33

New Investors Continue to Change the Reinsurance Landscape

First I.I.I. White Paper on Issue Was Released in March 2015

Global Reinsurance Capital (Traditional and Alternative), 2006 - 2014

2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.

Total reinsurance capital reached a record $570B in 2013, up 68% from

2008.

But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years.

Alternative Capital as a Percentage of Traditional Global Reinsurance Capital

2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.

Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010.

Catastrophe Bond Issuance and Outstanding: 1997-2014

37

Risk Capital Amount ($ Millions)

2014 Has Seen the Largest Cat Bond Ever - $1.5 Billion (Florida Citizens). Bond Issuance Set a Record.

Source: Guy Carpenter.

43

Performance by Segment

43

10

9.4

11

0.2

11

8.8

10

9.5 1

12

.5

11

0.2

10

7.6

10

4.1

10

9.7

11

0.2

10

2.5 1

05

.4

91

.1

93

.6

10

4.2

98

.9

10

2.4

10

7.9

10

3.4

98

.3 99

.9

98

.9

10

2.0

11

1.1

11

2.3

12

2.3

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

11

12

13

F

14

F

15

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2014F); Conning (2015F) Insurance Information Institute.

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

44

Commercial Auto Combined Ratio: 1993–2015F

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4

94

.1 96

.8 99

.1

97

.8

10

3.4 10

6.8

10

6.5

10

6.4

10

5.2

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 11 12 13 14E 15F

Commercial Auto is Expected to Improve Only Slowly as Rate Gains Barely Offset Adverse Frequency and Severity Trends

45Sources: A.M. Best (1990-2014E);Conning (2015F); Insurance Information Institute.

Commercial Property Combined Ratio: 2007–2016F

72.4

105.

8

83.3 86

.5

85.4 89

.4

90.1

106.

5

105.

8

82.7

70

75

80

85

90

95

100

105

110

07 08 09 10 11 12 13 14E 15F 16F

Commercial Property Underwriting Performance Has Been Volatile in Recent Years, Largely Due to

Fluctuations in CAT Activity

Source: Conning Research and Consulting. 46

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

104.

1

101.

4

103.

0

103.

9107.

1 110.

8

99.8

80

85

90

95

100

105

110

115

05 06 07 08 09 10 11 12 13F 14F 15F

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 47

Workers Compensation Combined Ratio: 1994–2014E

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5

103.

5

104.

5 110.

6 115.

0

115.

0

108.

0

101.

0

96.0

121.

7

107.

0

115.

3

118.

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 10 11 12 13 14F

Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-

2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2014F) and are for private carriers only; Insurance Information Institute. 48

WC results have improved markedly

since 2011

51

Growth Analysis by State and Business Segment

Post-Crisis Paradox? Premium Growth Rates Vary

Tremendously by State

51

52

-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 12 13 1415

F14

F

Net Premium Growth: Annual Change, 1971—2016F

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

*Actual figure based on data through Q3 2014.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.

2015-16F: 4.0%

2014E: 4.0%*

2013: 4.6%

2012: +4.3%

54

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

74

.6

36

.9

31

.9

27

.4

25

.2

24

.9

22

.5

22

.2

16

.6

15

.9

15

.7

14

.5

14

.5

14

.3

12

.6

11

.9

11

.8

11

.2

10

.5

10

.3

9.9

9.8

9.3

9.1

9.0

8.6

0

10

20

30

40

50

60

70

80

ND

SD

OK

NE

KS IA VT

TX

WY

TN

MN

AR

AK IN WI

CO M

I

KY

OH NJ

LA

SC VA

AL

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 StatesNorth Dakota was the country’s growth leader over the past 6 years with premiums written

expanding by 74.6%, fueled by the state’s energy boom

Growth Benchmarks: Total P/C

US: 7.9%

55

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

8.5

8.2

7.9

7.8

7.6

7.3

7.0

6.9

6.2

5.9

5.6

5.3

4.2

4.1

3.5

1.6

1.0

0.4

-0.7

-1.7

-1.9

-4.1

-5.7

-6.7

-12

.6

-15

.3

-20

-15

-10

-5

0

5

10

MS

CT

US

NC

GA

NY

MD

MA

UT

WA

PA IL RI

NH ID MT

ME

OR

CA

FL

DC AZ

WV HI

NV

DE

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 7 states and DC between

2007 and 2013

58

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

91

.1

42

.1

41

.4

33

.7

26

.3

25

.8

23

.6

19

.1

15

.6

14

.0

11

.3

10

.0

9.8

6.8

6.7

6.5

4.1

3.2

3.1

3.0

2.7

2.2

2.0

1.7

1.3

0.6

0

10

20

30

40

50

60

70

80

90

100

ND

OK

SD VT

NE IA KS ID AK

TX

WY

MN IN AR

TN W

I

OH

MA

CT

NM LA

MS

NJ

NY

US

MO

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

Only 30 states showed any

commercial lines growth from 2007

through 2013

Growth Benchmarks: Commercial

US: 1.3%

59

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

0.5

0.4

0.2

0.1

-0.5

-0.8

-0.9

-1.0

-1.1

-1.1

-1.9

-2.0

-2.1

-2.7

-3.3

-3.7

-4.3

-4.9

-10

.7

-11

.4

-11

.7

-12

.6

-12

.7

-13

.6

-22

.4

-25

.1

-30

-25

-20

-15

-10

-5

0

5

MD

NH PA

CO IL

WA

VA

KY

NC

ME RI

MI

SC AL

GA

CA

UT

DC

OR

MT HI

DE FL AZ

WV

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LLC.; Insurance Information Institute.

States with the poorest performing economies also produced the most negative

net change in premiums of the past 6 years

Nearly half the states have yet to see commercial lines premium

volume return to pre-crisis levels

60

Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2013*

32

.9

30

.8

24

.3

21

.5

13

.4

11

.5

11

.0

10

.6

8.1

4.8

4.5

3.0

1.5

-0.3

-0.6

-1.0

-2.3

-2.4

-2.9

-3.0

-3.7

-4.1

-5.7

-5.8

-8.0

-15

-10

-5

0

5

10

15

20

25

30

35

OK IA SD

NY

CA

CT

NJ

KS

NE IN MI

VT

MN

DC W

I

IL

NH

US

NM TX PA

VA

MD

TN AR

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 13 states have seen works comp premium volume

return to pre-crisis levels

61

Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2013*

-8.1

-8.4

-8.7

-8.8

-11

.1

-11

.3

-12

.0

-14

.7

-15

.3

-15

.4

-16

.0

-16

.3

-17

.1

-22

.1

-23

.0

-26

.5

-27

.5

-32

.5

-33

.3

-33

.5

-43

.8

-71

.0

-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50

MS

MA RI

GA

NC

AK ID CO LA

ME AZ

MO

SC AL

KY

UT FL

OR

DE HI

NV

MT

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

*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.

States with the poorest performing economies also produced some of the most

negative net change in premiums of the past 6 years

64

Commercial Lines Pricing Trends

Survey Results Suggest Commercial Pricing Is Mixed

64

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 22.4%

Great Recession:2009: -9.0%

ROE

2014E 4.0%

Commercial Lines NPW Premium Growth:1975 – 2014E

Recessions:1982: 1.1%

Commercial lines is prone to more cyclical volatility that personal

lines. Recently, growth has stabilized in the 4% to 5% range.

1988-2000: Period of

inter-cycle stability

2010-20XX? Post-

recession period of

stable growth?

Note: Data include state funds beginning in 1998.Source: A.M. Best; Insurance Information Institute.

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

66

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2015:Q1

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Percentage Change (%)

Peak = 2001:Q4 +28.5%

KRW : No Lasting Impact

Pricing turned positive in

Q3:2011, the first increase in nearly 8 years

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Rate trends are roughly flat, some carriers

reporting small gains, others flat, others small

declines

67

U.S. Insured Catastrophe Loss Update

2013/14 Experienced Below Average CAT Activity After Very High CAT Losses in

2011/12Winter Storm Losses Far Above Average in

2014 and 201567

68

$1

2.8

$1

1.1

$3

.8

$1

4.5

$1

1.7

$6

.2

$3

5.2

$7

.7

$1

6.5

$3

4.2

$7

4.5

$1

0.7

$7

.6

$2

9.6

$1

1.6

$1

4.6

$3

4.1

$3

5.5

$1

2.9

$1

5.5

$1

4.2

$4

.9 $8

.1

$3

8.3

$8

.9

$2

6.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

U.S. Insured Catastrophe Losses

*Through 12/31/14.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for

more—not fewer—Costly Events

2012 was the 3rd most expensive year ever for

insured CAT losses

$15.5 billion in insured CAT

losses in 2014

($ Billions, $ 2013)

68

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Loss events in the US, 1980 – 2014Number of events

69

Meteorological events(Tropical storm, extratropical storm, convective storm, local storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami,

volcanic activity)

Number of Events

7

72

24

16

2014 Total:119 Events

Source: Geo Risks Research, NatCatSERVICE

The number of loss events surged from 2006 – 2010,

though insured losses remained elevated through 2012

Loss Events in the US, 1980 – 2014Overall and insured losses

70

Overall losses (in 2013 values)*

Insured losses (in 2013 values)*

*Losses adjusted to inflation based on CPI.

Overall losses totaled US$ 25bn; Insured losses totaled US$ 15.3bn

50

100

150

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Source: Property Claim Services, MR NatCatSERVICE.

$ Billions

71

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2014E*

*2010s represent 2010-2014.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012) Insurance Information Institute (2013-14).

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

3.4

8.7 8.9

3.4 3.

9

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

2012

2014

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: 5.7E*

Combined Ratio Points Catastrophe losses as a share of all losses

reached a record high in 2012

73

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1994–20131

0.1%

1.4%

3.8%4.8%

6.4%

6.4%

36.0%

41.1%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 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, $159.1

Fires (4), $5.5

Events Involving Tornadoes (2), $139.3

Winter Storms, $24.7

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.6

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1993-2012

totaled $386.7B, an average of $19.3B per year or $1.6B

per month

Winter storm losses were much above average in

2014/15 and will push this

share up

Loss events in the US, 1980 – 2014Insured losses due to winter storms*

Insured losses (in 2014 values)**

**Losses adjusted to inflation based on country CPI

5 year Mean

*Winter storms include winter damage, blizzard, snow storm and cold wave

Overall losses in 2014 totaled $3.7B; Insured losses totaled $ 2.4BPreliminary figures for 2015 suggest $2.3B in insured winter storm losses.

74

1 000

2 000

3 000

4 000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Source: Property Claim Services, MR NatCatSERVICE.

$ Billions

75

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2013 Dollars, $ Billions)

$7.9 $8.8 $9.3 $11.2$13.6

$19.0$24.2 $24.9$25.9

$49.4

$7.6$7.2$6.8$5.7$5.6$4.5

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Superstorm Sandy in 2012 was the last

mega-CAT to hit the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade

Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.

84

Riots, Civil Commotion and Insurance

Damage to Insured Properties is Generally Covered Under Standard

Property and Auto PoliciesBaltimore Riots Have Officially Been

Designated a PCS CAT Event84

85

Insurance Coverage for Riots and Civil Commotions: Home, Auto and Business Auto, homeowners, and business insurance policies generally include

coverage for property losses caused by riots and civil commotions

Homeowners policies pay to repair, or rebuild, an insured home if its structure is damaged or destroyed as the result of a riot or civil commotion, as well as to replace the homeowner’s personal belongings if they are damaged or stolen during the event. If the home is rendered uninhabitable by the damage caused by a riot or civil

commotion, policyholders can file an additional living expenses (ALE) claim to finance their temp. housing expenses until the residence has been repaired.

The optional comprehensive coverage on an auto insurance policy reimburses losses to a vehicle due to damage caused by falling objects, fire, riots and vandalism, among other things. 

Standard business property insurance policies provide coverage for the structure of the building as well as the contents inside, and cover losses arising from riots or civil commotion. Business interruption (BI) coverage, whereby the policyholder can file a claim for lost income, is usually only triggered when the insured business incurs direct physical damage.

Source: Insurance Information Institute, www.iii.org .

86

Top 10 Insured Loss Events from Riots and Civil Commotion*

Source: PCS unit of Verisk Analytics; Insurance Information Institute

Year Deaths Date StateInsured Loss When

Occurred

Insured Losses

(2014 $MM)

1992 14 Apr 29 - May 4 CA 775,000,000 1,307.7

1980 62 May 17 - 19 FL 65,250,000 187.5

1967 48 Jul 23 - 31 MI 41,500,000 294.2

1965 87 11-Aug CA 38,000,000 285.6

1977 99 Jul 13 - 14 NY 28,000,000 109.4

1967 47 Jul 12 - 21 NJ 11,000,000 78.0

1966 20 12-Jul IL 4,000,000 29.2

1971 63 Jun 13 - 15 NM 3,000,000 17.5

1977 11 Jul 13 - 14 NY 2,000,000 7.8

1968 77 Jul 23 - 24 OH 1,500,000 10.2

 

April 2015 Baltimore riots were designated a PCS CAT event on April 29 but loss estimates are not yet available (2014 Ferguson riots did not receive PCS designation)

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

89

Growth Will Expand Insurer Exposure Base Across Most Lines

89

90

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/15; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-2.1

%4.

6% 5.0%

2.2%

0.2%

3.1%

3.0%

2.9%

2.8%

2.8%

2.8%

2.7%

-8.9%

4.5%

1.4%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

   2

00

7   

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

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

15

:1Q

15

:2Q

15

:3Q

15

:4Q

16

:1Q

16

:2Q

16

:3Q

16

:4Q

Demand for Insurance Should Increase in 2015 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in in June

2009

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

Q1 2014 GDP data were hit hard by this

year’s “Polar Vortex” and harsh

winter

State-by-State Leading Indicatorsthrough August 2015

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 91

Growth in the West is

finally beginning to pick up

The economic outlook for most of the US is generally

positive, though flat-to-negative for

2 states

102

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

8247

,806

40,0

7533

,212

26,9

83

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 12 13 14

Business Bankruptcy Filings,1980-2014

Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013-14 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.

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

2014 bankruptcies totaled 26,983, down 18.8% from 2013—the 5th consecutive year of decline.

Business bankruptcies more than tripled during the financial crisis.

% Change Surrounding Recessions

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

102

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

105

The Construction Sector Is Critical to the Economy and the P/C Insurance Industry

105

106

Value of New Private Construction: Residential & Nonresidential, 2003-2015*

Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

03 04 05 06 07 08 09 10 11 12 13 14 15*

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2014: Value of new pvt. construction hits $698.2B as of Feb. 2015, up 40%

from the 2010 trough but still 23% below 2006 peak

106

$261.8

$238.8

$348.4

$349.9

*2015 figure is a seasonally adjusted annual rate as of February.Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

107

Value of Construction Put in Place, Feb. 2015 vs. Feb. 2014*

3.1%

13.9%

2.9%2.1% 1.8%

-2.1%

5.9%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth In the Private Sector Slowed in Late 2014 While Picking in the State/Local Sector Government

Sector as Budget Woes Ease in Some Jurisdictions

Growth (%)

Private sector construction activity is up in the

residential and nonresidential segments but

growth is sluggish

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +1.8% Public: +3.1%Public sector

construction activity is finally beginning to pick up after years of

decline

108

Value of Private Construction Put in Place, by Segment, Feb. 2015 vs. Feb. 2014*

13.1%

-0.1%

-1.7%

-10.3%

16.2%

-15.3%-16.8%

38.7%

21.4%

1.8%

-2.1%

5.9%9.6%

22.8%

-20%

-10%

0%

10%

20%

30%

40%

50%

To

tal

Pri

vate

Co

nstr

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Lo

dg

ing

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Reli

gio

us

Am

usem

en

t &

Rec.

Tra

nsp

ort

ati

on

Co

mm

un

icati

on

Po

wer/

Uti

lity

Man

ufa

ctu

rin

g

Private Construction Activity is Up in Many Segments, though the Key Residential Construction Sector Weakened in Late 2014/Early 2015; Mixed

Outlook for 2015, though Expansion Should Continue

Growth (%) Led by the Manufacturing and Office segments, Private nonresidential

sector construction activity continues to rising after plunging during the

“Great Recession.” Residential weakened.

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

111

$314.9$304.0

$286.4 $279.0 $271.4$280.0

$268.9

$216.1 $220.2$234.2

$255.4

$289.1$308.7

$0

$50

$100

$150

$200

$250

$300

$350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

($ Billions)

Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Contracted As State/Local Governments Grappled with

Deficits and Federal Sequestration

Value of New Federal, State and Local Government Construction: 2003-2015*

*2014 figure is a seasonally adjusted annual rate as of December; http://www.census.gov/construction/c30/historical_data.html Sources: US Department of Commerce; Insurance Information Institute.

Construction across all levels of government

peaked at $314.9B in 2009

Austerity Reigns

Govt. construction MAY be turning a corner; still down

$46.0B or 14.6% since 2009 peak

112

(Millions of Units)

New Private Housing Starts, 1990-2021F

1.4

81

.47 1

.62

1.6

41

.57

1.6

0 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

60

.91

0.5

50

.59

0.6

1 0.7

8 0.9

21

.01 1

.16 1.3

0 1.4

11

.46

1.4

91

.52

1.5

2

1.3

51.4

61

.29

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 11 12 13 14 15F 16F 17F 18F 19F20F 21F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/15 and 3/15); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction

for several more years

113

Construction Employment,Jan. 2010—March 2015*

*Seasonally adjusted.Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

65,

583

5,57

65,

577

5,61

25,

629

5,62

95,

628

5,62

75,

608

5,62

35,

632

5,64

15,

649

5,66

85,

684

5,72

45,

746 5,79

85,

815

5,81

35,

833

5,85

65,

854

5,86

65,

893

5,91

85,

953

5,93

7 6,00

66,

032

6,06

2 6,10

36,

114

6,12

16,

152

6,16

96,

191

6,20

16,

231 6,27

5 6,31

66,

345

6,34

4

5,400

5,500

5,600

5,700

5,800

5,900

6,000

6,100

6,200

6,300

6,400

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

0M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Construction employment is +990,000 above

Jan. 2011 (+16.7%) trough

(Thousands)

Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.

114

Construction Employment, Jan. 2003–March 2015

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

5,000

5,500

6,000

6,500

7,000

7,500

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

The “Great Recession” and housing bust destroyed 2.3 million constructions jobs

The Construction Sector Was a Growth Leader in 2014 as the Housing Market, Private Investment and Govt. Spending Recover. WC Insurers Will Benefit.

Construction employment troughed at 5.435 million in

Jan. 2011, after a loss of 2.291 million jobs, a 29.7% plunge

from the April 2006 peak

114

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of Mar. 2015 totaled 6.344 million, an

increase of 990,000 jobs or 16.7% from

the Jan. 2011 trough

Gap between pre-recession

construction peak and today: 1.38 million jobs

MANUFACTURING SECTOR OVERVIEW & OUTLOOK

115

The U.S. Is Experiencing a Mini Manufacturing Renaissance but Headwinds from Weak Export

Markets and Strong Dollar115

116

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—February 2015

* Seasonally adjusted; Data published Apr. 2, 2015.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Feb. 2015 are similar to pre-crisis (July 2008) peak but has declined in recent months. Manufacturing is energy-intensive and growth leads to

gains in many commercial exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

116

The value of Manufacturing Shipments in Feb. 2015 was

$481.3B—down slightly since the July 2014 record high of $508.1B

117

Manufacturing Growth for Selected Sectors, 2015 vs. 2014*

-0.5%

2.0%

-2.2%

6.3%

-9.7%

2.3%

-34.0%

-4.1%-2.4%

8.8%

-3.7%

3.0%

9.7%

0.1%3.1%

-40%-35%-30%-25%-20%-15%-10%

-5%0%5%

10%15%

All

Ma

nu

fact

uri

ng

Du

rab

le M

fg.

Wo

od

Pro

du

cts

Pri

ma

ryM

eta

ls

Fa

bri

cate

dM

eta

ls

Ma

chin

ery

Ele

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cal

Eq

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.

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mp

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rs &

Ele

ctro

nic

s

Tra

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atio

nE

qu

ip.

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n-D

ura

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Mfg

.

Fo

od

Pro

du

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m &

Co

al

Ch

em

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l

Pla

stic

s &

Ru

bb

er

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Pro

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Manufacturing Is Expanding in Many Sectors But Declining Energy Prices Are Dragging Down Industry Figures. Continued Gortwh Across a Number of

Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods is stronger than

nondurables in 2015

*Seasonally adjusted; Date are YTD comparing data through February 2015 to the same period in 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +3.0% Non-Durables: -9.7%

Impact of falling energy prices

Manufacturing Employment,January 2010—March 2015*

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

Apr-1

4

Jul-1

4

Oct-1

4

Jan-

1511,250

11,500

11,750

12,000

12,250

12,50011,4

62

11,4

53

11,4

58

11,4

93

11,5

27

11,5

43

11,5

71

11,5

50

11,5

57

11,5

57

11,5

81

11,5

92

11,6

20

11,6

53

11,6

75

11,7

04

11,7

11

11,7

23

11,7

55

11,7

63

11,7

66

11,7

73

11,7

71

11,7

98

11,8

37

11,8

59

11,9

01

11,9

16

11,9

28

11,9

39

11,9

79

11,9

56

11,9

42

11,9

47

11,9

51

11,9

65

11,9

82

12,0

04

12,0

07

12,0

01

11,9

94

11,9

91

11,9

82

11,9

90

11,9

93

12,0

11

12,0

46

12,0

53

12,0

61

12,0

81

12,0

85

12,0

94

12,1

03

12,1

30

12,1

54

12,1

57

12,2

14

12,2

37

12,2

82

12,3

01

12,3

18

12,3

20

12,3

19

118

Thousands In the past 5 years (from January 2010) manufacturing employment

is up (+857,000 or +7.5%)and still growing.

Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.

*Seasonally adjusted; Feb. and Mar. 2015 are preliminarySources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT

BUT VOLATILE

123

US Is Becoming an Energy Powerhouse but Fall in Prices

Will Have Negative Impact

123

5.19 5.08 5.00 5.35 5.47 5.656.49

7.44

8.679.31 9.53

5.09

0

2

4

6

8

10

12

U.S. Crude Oil Production, 2005-2016P

Source: Energy Information Administration, Short-Term Energy Outlook (January 15, 2015) , Insurance Information Institute.

Millions of Barrels per Day

Crude oil production in the U.S. is expected to increase by 90.6% from 2008 through 2016—and could overtake

Saudi Arabia as the world’s largest oil producer

126

Oil & Gas Extraction Employment,Jan. 2010—March 2015*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

6 169.

317

0.1

171.

017

2.5

173.

6 176.

317

8.2

178.

518

0.9

181.

318

2.3

184.

718

5.2

186.

218

7.8

188.

618

9.3

189.

418

9.4

190.

519

2.2

193.

119

4.6

194.

019

3.8

193.

119

2.5

193.

019

3.4

193.

319

3.1

194.

019

4.0

194.

019

5.4

193.

719

4.6

196.

419

7.6

198.

619

8.4

199.

420

1.5

201.

020

1.2

199.

419

8.0

198.

3

150

160

170

180

190

200

210

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

1M

ar-1

2A

pr-1

2M

ay-1

2Ju

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Jul-1

2A

ug-1

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ep-1

2O

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2D

ec-1

2Ja

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Despite recent declines, Oil and gas extraction employment is

still up 26.8% since Jan. 2010 as the energy sector booms.

Domestic energy production is essential to any robust

economic recovery in the US.

(Thousands) After peaking at its highest level since 1986, O&G employment is

falling as oil and gas prices decline

127

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend Has Greatly Improved

127

128

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Jan15

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 5.5% in Mar. 2015. 4.5% to

5.5% is “normal.”

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

January 2000 through March 2015, Seasonally Adjusted (%)

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving.

128

U-6 soared from 8.0% in March

2007 to 17.5% in October 2009; Stood at 10.9%

in Mar. 2015.8% to 10% is

“normal.”

129

US Unemployment Rate Forecast4

.5%

4.5

%4

.6%

4.8

%4

.9% 5.4

% 6.1

%6

.9%

8.1

%9

.3%

9.6

% 10

.0%

9.7

%9

.6%

9.6

%

8.9

%9

.1%

9.1

%8

.7%

8.3

%8

.2%

8.0

%7

.8%

7.7

%7

.6%

7.3

%7

.0%

6.6

%6

.2%

6.1

%5

.7%

5.6

%5

.4%

5.3

%5

.2%

5.1

%5

.0%

5.0

%4

.9%

9.6

%

4%

5%

6%

7%

8%

9%

10%

11%

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

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

15

:Q1

15

:Q2

15

:Q3

15

:Q4

16

:Q1

16

:Q2

16

:Q3

16

:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/15 edition); Insurance Information Institute.

2007:Q1 to 2016:Q4F*

Unemployment forecasts have been revised modestly

downwards. Optimistic scenarios put the

unemployment as low as 5.0% by Q4 of 2015.

Jobless figures have been revised

downwards for 2015/16

23

15

21

70

52

12

65

73

-71

32 6

4 81

55

3-1

15

-10

6-2

21

-21

5-2

06

-26

1-2

58

-42

2-4

86

-77

6 -69

3-8

21

-69

8-8

10

-80

1-2

94

-42

6-2

72

-23

2 -14

1-2

71

-15

-23

22

0-3

81

92

94 11

01

20

11

71

07

19

91

49

94

72

22

32

31 3

20

16

61

86 21

91

25

26

81

77

19

12

22

36

42

28

24

61

02

13

17

51

72

13

61

59

25

52

11

21

52

19 26

31

64

18

82

22

20

11

70

18

01

53

24

72

72

86

18

31

75 22

33

13

23

8 27

22

43

20

92

35

21

84

14

31

92

02 2

64

12

9

11

3

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15F

eb-1

5M

ar-1

5

Monthly Change in Private Employment

January 2007 through Mar. 2015 (000s, Seasonally Adj.)

Private Employers Added 11.20 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 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

129,000 private sector jobs were

created in March. In March 2014, the last of the private jobs lost in the Great Recession were

recovered

130

Jobs Created2014: 3.042 Mill2013: 2.452 Mill2012: 2.315 Mill2011: 2.396 Mill2010: 1.282 Mill

3,042,000 jobs were created in 2014, the most since 1997

131

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2014:Q4

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,250

$7,500

$7,75005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

213

:Q3

13:Q

414

:Q1

14:Q

214

:Q3

14:Q

4

Prior Peak was 2008:Q3 at $6.54 trillion

Recent trough (2009:Q1) was $6.23 trillion, down

5.3% from prior peak

Growth rates2011:Q3 over 2010:Q3: 4.1%2012:Q3 over 2011:Q3: 3.2%2013:Q3 over 2012:Q3: 3.6%2014:Q4 over 2013:Q4: 5.1%

131

Latest (2014:Q4) was $7.57 trillion, a new peak--$1.34 trillion above 2009 trough

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

132

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2014P

*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are I.I.I. estimates..Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2015

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

135

Manufacturing Employment,Jan. 2010—March 2015*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

3411

,857

11,8

9911

,916

11,9

3011

,941

11,9

6511

,961

11,9

4811

,951

11,9

4711

,961

11,9

8012

,002

12,0

0612

,006

12,0

0712

,005

11,9

8312

,011

12,0

2212

,040

12,0

7212

,086

12,1

0212

,122

12,1

3112

,142

12,1

5412

,177

12,1

9112

,205

12,2

1412

,237

12,2

8212

,301

12,3

1812

,320

12,3

19

11,250

11,500

11,750

12,000

12,250

12,500Ja

n-1

0F

eb

-10

Ma

r-1

0A

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10

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p-1

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0Ja

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Jan

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Fe

b-1

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ar-

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Ap

r-1

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ay-

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-13

Jul-

13

Au

g-1

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ep

-13

Oct

-13

No

v-1

3D

ec-

13

Jan

-14

Fe

b-1

4M

ar-

14

Ap

r-1

4M

ay-

14

Jun

-14

Jul-

14

Au

g-1

4S

ep

-14

Oct

-14

No

v-1

4D

ec-

14

Jan

-15

Fe

b-1

5M

ar-

15

Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.

*Seasonally adjusted. Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands) Since Jan 2010, manufacturing

employment is up (+859,000 or +7.5%)and still growing.

Workers Compensation Operating Environment

136

Workers Comp Results Have Improved Substantially in Recent Years

136

Workers Compensation Premium: Third Consecutive Year of IncreaseNet Written Premium

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3

25.0 26.129.2 31.1

34.737.8 38.6 37.6

33.830.3 29.9

32.335.1 37.0

35.3 35.734.3 35.4

33.6

30.128.5

26.9 25.9 25.0

28.6

32.1

37.7

42.3

46.547.8

46.544.3

39.3

34.6 33.836.4

39.641.9

State Funds ($ B)

Private Carriers ($ B)

Pvt. Carrier NWP growth was +5.4% in 2013 and

8.7% in 2012

$ Billions

Calendar Yearp Preliminary

Source: 1990–2013p Private Carriers, Annual Statement Data, NCCI.1996–2013p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

Workers Compensation Lost-Time Claim Frequency Declined in 2013Lost-Time Claims

140

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

-8

-6

-4

-2

0

2

4

6

8

10

12

-4.2 -4.4

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3

-5.7

11

-4

-6.1

-2.0

3.5

-1

AdjustedIndicated

Frequency Change: 2007—2012

Contracting: 7.97.1 -9.3%

Manufacturing: 13.612.0 -11.8%

Percent

Accident Year*Adjustments primarily due to significant audit activity.2013p: Preliminary based on data valued as of 12/31/20131991–2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policiesFrequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost levelSource: NCCI.

Cumulative Change of –55.4%(1991–2011 adj.)

Workers Compensation Medical SeverityModerate Increase in 2013

141

Accident Year

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%

Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)

$8

.1

$8

.2

$8

.1

$8

.8

$9

.1

$9

.8

$1

0.8

$11

.7

$1

2.9

$1

3.9

$1

5.7

$1

7.1

$1

8.4

$1

9.4

$2

1.0

$2

2.2

$2

3.5

$2

5.1

$2

6.1

$2

6.4

$2

7.1

$2

7.9

$2

8.8

+6.8%+1.3%-2.1%+9.0%+5.1%

+7.4%+10.1%

+8.3%+10.6%

+7.3%

+13.5%

+8.8%+7.7%

+5.4%

+7.8%+5.8%

+6.1%

+6.8%+4.0%+1.2%

+2.6%+3.0%

+3%

5

10

15

20

25

30

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

2013p: Preliminary based on data valued as of 12/31/2013.1991-2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Cumulative Change = 256%(1991-2013p)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2013: +5.2%

Accident Year

4.5%

3.5%2.8%

3.2%3.5%4.1%

4.6%4.7%4.0%

4.4%4.2%4.0%4.4%

3.7%3.2%3.4%

3.0% 3.0%

5.1%

7.4%

10.1%10.6%

13.5%

5.4%

7.8%

6.1%6.8%

4.0%

3.0%

2.0%

4%

3%

1.2%

5.8%

8.8%

7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13p

Change in Medical CPI

Change Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but

the gap is narrowing.

CYBER RISK & CYBER INSURANCE

153

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and

Small in Every IndustryRapidly Increasing Interest from

Businesses, Media & Public Policymakers153

Data Breaches 2005-2014, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

* 2014 figures as of Jan. 12, 2014 from the ITRC.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619

783

662

85.687.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches Rose 28% While the Number of Records Exposed Was Relatively Flat (-2.6%)

Millions

154

Data/Privacy Breach:Many Potential Costs Can Be Insured

Source: Zurich Insurance; Insurance Information Institute

Forensic costs to discover

cause

156

Source: Insurance Information Institute research.

The Three Basic Elements of Cyber Coverage: Prevention, Transfer, Response

Loss Prevention

Post-Breach Response(Insurable)

Loss Transfer (Insurance)

Cyber risk management today involves three essential components, each designed

to reduce, mitigate or avoid loss. An increasing number of cyber risk products

offered by insurers today provide all three.

157

173

Autonomous/Driverless Vehicles

173

Rapid Technological Innovations in Motor Vehicle Engineering Are

Likely to Transform Auto Insurance and Product Liability Markets

175

Projected Sales of Partially and Fully Autonomous Vehicles through 2035

By 2035, it is estimated that 25% of new vehicle sales

could be fully autonomous models

Source: Boston Consulting Group.

Shifting Legal Liability & Tort Environment

187

Will the Tort PendulumSwing Against Insurers?

187

188

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 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, 2011 Update on US Tort Cost Trends, Appendix 1A

Tort costs in dollar terms have remained high but relatively stable

since the mid-2000s., but are down substantially as a share of GDP

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

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193