personal lines p-c insurance markets: trends, challenges & opportunities for 2012 & beyond...

Personal Lines P-C Insurance Markets:

Trends, Challenges & Opportunities for 2012 & Beyond

Insurance Information InstituteJanuary 31, 2012

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

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

2

Presentation Outline

Personal Lines Growth Overview Auto, Home: US and by State Average Premium/Expenditures

Personal Lines Growth Drivers Exposure, Pricing Factors

Personal Lines Profitability Analysis Catastrophe Loss Trends: US & Global Impacts Reinsurance Market Overview & Outlook Cyclical Drivers in Personal Lines

Loss as a Cyclical Driver Private Passenger Auto Performance Distribution Trends P/C Financial Overview & Outlook: The Role of Cyclicality

Profitability Premium Growth Capital, Capacity and Financial Strength Underwriting Performance Investment Performance

Financial Crisis, Recession & Recovery: P/C Insurer Impacts Regulatory Environment “Report Card” Q&A

3

Personal Lines Growth Analysis

Growth Trajectories Differ Substantially by Line, by

State and Over Time

4

Distribution of Direct Premiums Written by Segment/Line, 2010

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

Personal/Commercial lines split has been about 50/50 for many years; Personal Lines overtook Commercial Lines in 2010

Pvt. Passenger Auto is by far the largest line of insurance and is currently the most important source of industry profits

Billions of additional dollars in homeowners insurance premiums are written by state-run residual market plans

Distribution Facts

Commercial Lines$226.8B/49%

2010

Pvt. Pass Auto$165.0B/36%

Homeowners$68.2B/15%

5

Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2013F

14.5%

2.7%2.6%2.2%1.4%

-0.9%0.9%

9.2%

6.9% 7.0%6.4%

5.6%

2.2%

5.7%

4.5%4.0%3.1%

0.2%-4.9%

15.3%

5.0%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

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

Private Passenger AutoHomeownersAll Lines

Sources: A.M. Best (historical); Insurance Information Institute (2011F-2013F).

Average 2000-2010Auto = 2.8

Home = 6.4%All Lines = 3.6%

While homeowners insurance has grown faster than auto over the past decade, auto is

generally more profitable

6

$119.7

$128.0

$139.7

$151.2

$159.1 $158.0 $156.6 $158.9$160.2$159.6$157.3

$100

$110

$120

$130

$140

$150

$160

$170

$180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

PP Auto premiums written have been basically flat in recent years to the weak economy impacting

new vehicle sales, car choice, and increased price sensitivity among

consumers, though growth is returning to the market

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

Private Passenger Auto InsuranceNet Written Premium, 2000–2010

$ Billion

7

$19.5

$21.8

$24.6$25.4 $25.5

$23.7

$21.8$20.9

$26.6 $26.7 $26.7

$15

$17

$19

$21

$23

$25

$27

$29

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


$ Billion

In contrast to flat PP Auto NPW, Commercial auto premiums are down 22.0% since 2005 due to

soft market conditions in commercial lines and negative

exposure trends

Commercial Auto InsuranceNet Written Premium, 2000–2010

8

Percent Change in DPW: Pvt. Pass. Auto by State, 2005-2010

15.8

14.6

12.1

10.9

9.9

8.6

8.6

8.1

7.6

7.0

6.0

6.0

5.9

5.8

5.8

5.7

4.5

4.1

4.1

3.8

3.5

3.5

3.3

3.1

3.0

0

2

4

6

8

10

12

14

16

18

TX UT

OK LA WY

NM WA

AK

SC

MT

ND

KS WI

NC ID OR

DE

MS

MO TN IA AL

GA

SD AR

Pec

ent c

hang

e (%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Texas was the fastest growing state between

2005 and 2010

9

2.7

2.4

2.4

2.0

1.7

1.6

1.6

1.5

0.8

0.6

-0.6

-0.8

-0.8

-1.0

-1.1

-1.6

-1.8

-2.1

-5.2

-5.9

-5.9

-6.8

-7.3

-8.6

-9.9

-18.

7

-25

-20

-15

-10

-5

0

5

NV

DC

KY

MD VA IL NJ

WV

NE FL CT IN PA

CO NY AZ

CA HI

OH MI

MN VT RI

NH

ME

MA

Pec

ent c

hang

e (%

)


Massachusetts saw the biggest drop in premiums written, due in large part to recent reforms that

increased competition and lowered overall rate levels

Percent Change in DPW: Pvt. Pass. Auto by State, 2005-2010

Bottom 25 States

10

Homeowners InsuranceNet Written Premium, 2000–2010

$45.8

$49.5

$52.2$54.6 $54.9

$60.4

$57.2$55.7

$32.4

$40.0

$35.2

$30

$35

$40

$45

$50

$55

$60

$65

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


$ Billions

Homeowners insurance NWP continues to rise (up 86.5% 2000-2010) despite very

little unit growth in recent years. Reasons include rate increases, especially in

coastal zones, ITV endorsements (e.g., “inflation guards”), and inelastic demand

11

Average Premiums For Home InsuranceBy State, 2009* (1)

$1

,51

1

$1

,46

0

$1

,43

0

$1

,18

5

$1

,12

3

$1

,06

9

$1

,06

9

$1

,03

5

$1

,02

1

$1

,01

6

$9

91

$9

87

$9

70

$9

22

$9

19

$9

19

$8

93

$8

92

$8

81

$8

80

$8

79

$8

53

$8

49

$8

48

$7

94

$7

89

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

TX

(2)

FL

(3) LA

MS

OK

DE RI

MA

NY

CT

KS AL

SC

CA

(4)

AR

MN

CO AK

MO

US HI

ND

NE

NJ

TN IL

*Latest available.

(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.

Source: NAIC; Insurance Information Institute.

Top 25 States

12

Average Premiums For Home InsuranceBy State, 2009* (1)

$7

87

$7

79

$7

57

$7

51

$7

51

$7

40

$7

34

$7

27

$7

25

$7

17

$7

17

$7

11

$7

03

$6

94

$6

71

$6

51

$6

45

$6

45

$6

42

$6

13

$6

10

$5

52

$5

44

$5

44

$5

42

$4

85

$0

$200

$400

$600

$800

GA

MD

NH

MT

NM M

I

VA

WY

NC IN VT

KY

NV

PA

WV

ME IA SD AZ

OH

DC

WA

OR

UT WI

ID

(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.

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

Bottom 25 States

13

2.35

%

2.28

%

2.16

%

2.16

%

1.78

%

1.72

%

1.57

%

1.56

%

1.45

%

1.42

%

1.28

%

1.28

%

1.27

%

1.24

%

1.23

%

1.21

%

1.19

%

1.17

%

1.16

%

1.13

%

1.13

%

1.12

%

1.10

%

1.09

%

1.09

%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

TX FL MS LA OK AR AL SC KS NM MO TN DC NY RI NE CA US GA KY WV MT MN NC ND

*Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of fourSources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

Top 25 States(Percent)

Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009

14

1.08

%1.

05%

1.05

%1.

05%

1.03

%1.

03%

1.01

%1.

00%

0.99

%0.

97%

0.97

%0.

97%

0.96

%0.

93%

0.88

%0.

87%

0.86

%0.

86%

0.86

%0.

86%

0.85

%0.

80%

0.79

%0.

77%

0.76

%0.

71%

0.68

%

0.00%

0.50%

1.00%

1.50%

2.00%C

O AK IN MI

HI

MA

NV

CT IL AZ

WY

ME

SD VT

PA IA DE

OH VA

NH NJ ID UT

MD

OR W

I

WA

*Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of fourSources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

(Percent) Bottom 25 States

Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009

15

Personal Lines Growth Drivers

Rate is Presently a Bigger Driver than Exposure

16

Monthly Change* in Auto Insurance Prices, 1991–2011*

*Percentage change from same month in prior year; through December 2011; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

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

Cyclical peaks in PP Auto tend to occur

approximately every 10 years (early 1990s, early

2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in 2010 at

5.1%, falling to 3.6% in 2011

17

Monthly Change* in Auto Insurance Prices, January 2005 - December 2011

(Percent Changefrom same month,prior year)

* Percentage change from same month in prior year, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute

3.4

%3

.3%

3.0

%2

.9%

2.4

%2

.2%

2.0

%1

.9%

1.3

%0

.6% 0.9

%0

.5%

0.2

%0

.4%

0.4

%0

.5%

0.3

%0

.2%

0.2

%1

.0%

1.6

%1

.1%

0.8

%0

.7%

0.8

%0

.6%

0.4

%-0

.2%

0.3

% 0.6

%0

.6%

0.4

%0

.1%

0.2

% 0.5

% 0.9

%1

.1% 1.4

% 1.7

%2

.6%

2.6

%2

.7% 3.0

%3

.1% 3.4

% 3.8

%4

.0%

4.0

% 4.3

%4

.4%

4.6

%4

.6%

4.7

%4

.6%

4.6

%4

.6%

4.6

%4

.6%

4.7

%4

.7%

4.9

% 5.3

%5

.3%

5.3

%5

.1% 5.3

%5

.1%

5.1

% 5.4

%5

.3%

5.3

%4

.5%

4.2

%4

.0%

3.8

%3

.8%

3.7

%3

.3%

3.4

%3

.3%

2.9

%3

.0% 3

.4%

0.9

%

-1%

0%

1%

2%

3%

4%

5%

6%

Jan 0

5F

eb 0

5M

ar

05

Apr

05

May 0

5Jun 0

5Jul 0

5A

ug 0

5S

ep 0

5O

ct 05

Nov 0

5D

ec 0

5Jan 0

6F

eb 0

6M

ar

06

Apr

06

May 0

6Jun 0

6Jul 0

6A

ug 0

6S

ep 0

6O

ct 06

Nov 0

6D

ec 0

6Jan 0

7F

eb 0

7M

ar

07

Apr

07

May 0

7Jun 0

7Jul 0

7A

ug 0

7S

ep 0

7O

ct 07

Nov 0

7D

ec 0

7Jan 0

8F

eb 0

8M

ar

08

Apr

08

May 0

8Jun 08

Jul 0

8A

ug 0

8S

ep 0

8O

ct 08

Nov 0

8D

ec 0

8Jan 0

9F

eb 0

9M

ar

09

Apr

09

May 0

9Jun 0

9Jul 0

9A

ug 0

9S

ep 0

9O

ct 09

Nov 0

9D

ec 0

9Jan 1

0F

eb 1

0M

ar

10

Apr

10

May 1

0Jun 1

0Jul 1

0A

ug 1

0S

ep 1

0O

ct 10

Nov 1

0D

ec 1

0Jan 1

1F

eb 1

1M

ar

11

Apr

11

May 1

1Jun 1

1Jul 1

1A

ug 1

1S

ep 1

1O

ct 11

Nov 1

1D

ec 1

1

Auto Insurance Price Increases Have Averaged 5.1% in 2010 over 2009, After

Averaging 4.5% in 2009 over 2008.

Underwriting performance remained

strong even when prices were flat or

falling due to improvements in

underlying frequency and severity trends

PPA Auto, like most p/c lines, exhibits strong cyclicality in pricing. Prices rose from 2000 to late 2005, were flat/falling in 2006 and 2007 before beginning to

rise gain in 2008.

Pricing weakened materially in 2011 and

growth now lags homeowners

18

Average Expenditures on Auto Insurance

$651$668

$691$705

$726

$786

$830$842

$831$816

$795 $789 $785$808

$690$685$703

$600

$650

$700

$750

$800

$850

$900

$950

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

Countrywide Auto Insurance Expenditures Decreasedby 0.8% in 2008 and 0.5% in 2009 and Increased 3.0% in 2010 (est.)

* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimate for 2010 based on CPI and other data.

The average expenditure on auto insurance is lower today than it was in 2003

19

Average Expenditures For Auto InsuranceBy State, 2009

$1

,12

8

$1

,10

1

$1

,09

9

$1

,05

7

$1

,02

1

$1

,00

6

$9

69

$9

52

$9

44

$9

29

$9

13

$8

97

$8

60

$8

60

$8

37

$8

26

$8

15

$8

11

$7

86

$7

85

$7

54

$7

54

$7

41

$7

38

$7

38

$7

28

$0

$200

$400

$600

$800

$1,000

$1,200

DC NJ

LA

NY

DE FL RI

CT

NV

MD MI

AK

MA

TX AZ

WA

WV

PA HI

US

CA

GA

CO

MS

SC IL

Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.

Source: © 2010 National Association of Insurance Commissioners.

Top 25 States

20

Average Expenditures For Auto InsuranceBy State, 2009

$7

23

$7

18

$7

16

$7

13

$6

99

$6

94

$6

80

$6

68

$6

67

$6

56

$6

55

$6

52

$6

46

$6

34

$6

23

$6

20

$6

16

$6

10

$5

98

$5

91

$5

78

$5

59

$5

55

$5

32

$5

21

$5

10

$0

$200

$400

$600

$800

OR

NH

UT

NM KY

MN

OK

MO VA

AR

MT AL

VT

TN

WY IN OH

NC

ME WI

KS

NE ID IA SD

ND

Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.

Source: © 2010 National Association of Insurance Commissioners.

Bottom 25 States

21

1.66

%

1.59

%

1.57

%

1.37

%

1.36

%

1.35

%

1.35

%

1.34

%

1.29

%

1.28

%

1.27

%

1.23

%

1.22

%

1.19

%

1.11

%

1.11

%

1.11

%

1.11

%

1.08

%

1.06

%

1.05

%

1.04

%

1.04

%

1.03

%

1.02

%

0.00%

0.50%

1.00%

1.50%

2.00%

LA DC FL WV NV NM MS TX MI NY AZ AR DE SC KY RI GA NJ OK AK US UT AL PA TN

*Average auto insurance expenditure as a percentage of the 2009 median income for a family of fourSources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009


22

1.02

%

1.01

%0.

98%

0.97

%0.

97%

0.94

%0.

92%

0.92

%0.

92%

0.91

%0.

91%

0.91

%0.

90%

0.89

%0.

86%

0.86

%0.

85%

0.84

%0.

83%

0.83

%0.

81%

0.80

%0.

78%

0.78

%0.

78%

0.72

%0.

65%

0.00%

0.50%

1.00%

1.50%

2.00%

WA

OR

MT

MO CA

CT HI

ID NC

MD IL IN CO

ME

OH

MA

KS

VT

WY

MN

NH

NE VA

SD WI

IA

ND

*Average auto insurance expenditure as a percentage of the 2009 median income for a family of fourSources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.


Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009

23

16.9

16.5

16.1

13.2

10.4

11.6

12.8 13

.7 14.4

14.7 15

.1

15.4

15.5

15.4

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F 17F 18-22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2022F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute.

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

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is

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

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

2012 and beyond

24

Number of Insured Vehicles in the US, 2000-2009*

15

9.9 16

4.6 16

8.8 17

3.1

17

5.9 18

0.6

18

1.6 18

5.6

18

7.1

18

6.8

133

143

153

163

173

183

193

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(mill

ion

s)

*Latest available as of Nov. 2011.

Source: Automobile Insurance Plans Service Office.

The Number of Insured Passenger Vehicles Stopped Growing During the Economic Downturn. Growth Has Likely Returned.

Do Changes in Miles Driven AffectAuto Collision Claim Frequency?

7.00

6.81

6.59

6.80 6.78

6.91

6.65

6.32

6.025.94

5.71

5.85

5.705.62 5.60 5.62

5.5

6.0

6.5

7.0

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

Pa

id C

laim

Fre

q

2400

2500

2600

2700

2800

2900

3000

3100

Bil

lio

ns

of

Mil

es D

rive

n

Collision Claim FrequencyBillions of Vehicle Miles

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 2nd Qtr. 2011, published Sep. 30, 2011 and earlier reports. *2011 ISO figure is for 12 months ending 6/30/2011; FHA data is for 12 months ending Sep. 2011.

Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100

People are driving less in

2011 (-1.3% Sept. 2011 vs, Sept.

2010), and frequency is flat

http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm

28

(Millions of Units)

New Private Housing Starts, 1990-2022F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

0 0.7

1 0.8

7

1.3

4

1.2

3

1.3

2

1.3

81

.42

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F17F 18-22F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

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

is holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

Average Square Footage of Completed New Homes in U.S., 1973-2011*

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

2,43

82,

389

2,51

8

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 08 09 10 11*

*2011 figure is weighted average square feet of completed homes in first three quarters of 2011Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.

Square Ft

The trend toward building larger homes reversed from2008 - 2010, affecting exposure growth beyond the decline in number of units built.

Rising again in 2011.

The average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions

29

The average size of completed new homes fell by 147 square feet (5.75%) from 2008-2010. This was the largest recession-based drop in nearly four decades.

http://www.census.gov/const/www/quarterly_starts_completions.pdf

34

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2010-2012 based on CPI and other data.

$508$536

$593

$668

$822 $830

$880$914

$956

$1,004

$804$764

$729

$500

$600

$700

$800

$900

$1,000

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

Home insurance premiums are rising in response to higher

catastrophe losses

35

51.5

46.7

36.8

36.4

36.4

35.5

35.3

35.1

33.4

32.2

32.1

32.1

32.0

31.5

31.2

29.9

29.6

29.6

29.2

28.8

28.8

28.6

28.2

27.2

26.7

05

1015202530354045505560

HI

LA ID

MO DE

AR

NM SC

MS

NC RI

UT

GA AL

WY

ND

TN KY

CT

OK

MN

MT

ME

NH

NY

Pec

ent c

hang

e (%

)


Hawaii was the fastest growing state between

2005 and 2010

Percent Change in DPW: Homeowners, by State, 2005-2010

Top 25 States

36

26.1

25.6

25.0

24.5

24.3

24.0

23.9

23.6

23.2

22.4

22.4

22.2

22.1

21.1

20.8

20.3

19.2

18.9

18.1

16.2

14.2

12.2

9.6

8.4

7.0

0.0

0

5

10

15

20

25

30

NJ

KS VA

MA

WA FL TX IL WI IA

OR

SD

CO IN NE

OH VT

AK

DC PA

MD

WV AZ

NV

CA MI

Pec

ent c

hang

e (%

)


Michigan was the slowest growing state

between 2005 and 2010

Percent Change in DPW: Homeowners, by State, 2005-2010

Bottom 25 States

37

U.S. Residual Market Exposure to Loss($ Billions)

Source: PIPSO; Insurance Information Institute (I.I.I.).

$281.8

$757.9

$430.5$372.3

$54.7

$150.0

$292.0$244.2$221.3

$419.5

$656.7$696.4

$771.9$703.0

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

($ Billions)

In the 21-year period from 1990 through 2010, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7

billion in 1990 to $757.9 billion in 2010.

Hurricane Andrew

4 Florida Hurricanes

Katrina, Rita and Wilma

40

Personal Lines Profitability Analysis

Significant Variability Over Time and Across States

41

Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2010*

*Latest available.**Excluding 1992, the Hurricane Andrew, produces a homeowners RNW of 3.5%.Sources: NAIC.

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

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

US All Lines US Home US PP Auto(Percent)

Average RNW: 1990-2010*

All P-C Lines: 7.9% PP Auto: 8.9% Homeowners: 0.7%**

Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues

Hurricane Andrew

42

Return on Net Worth: All P-C Lines vs. Pvt. Pass. Auto, 1990-2010*

*Latest available. Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

US All Lines US PP Auto(Percent)


All P-C Lines: 7.9% PP Auto: 8.9%

Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13 of the 21 Years from 1990-2010 (Inclusive)

43

Return on Net Worth: All P-C Lines vs. Homeowners, 1990-2010*

*Latest available.**Excluding Hurricane Andrew (1992); including 1992 produces an average homeowners RNW of 0.7%.Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

25%

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

US All Lines US Home(Percent)


All P-C Lines: 7.9% Homeowners: 3.5%**

Homeowners Insurance Is Considerably More Volatile than the Market Overall Due to Coastal Exposure and Interior Wind/Hail Events

44

18.5

14.5

14.3

14.1

13.5

12.4

12.1

11.8

11.7

11.6

11.3

11.2

11.1

11.0

10.8

10.7

10.7

10.5

10.4

10.2

9.8

9.7

9.6

9.2

9.1

02468

10121416182022

HI VT ME ID DC NH ND MN SD OH KS NM CT IA RI OR WY VA AZ WI CA UT IN AL AK

RN

W P

PA

*Latest available.

Sources: NAIC.

Hawaii was the most profitable state for auto insurers from 2001-2010

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*)


45

9.0

8.9

8.8

8.8

8.5

8.4

8.0

7.8

7.7

7.6

7.5

7.4

7.4

7.4

7.4

7.1

7.1

7.1

7.0

6.8

5.4

5.3

5.1

4.2

3.4

2.7

-1.2-2

0

2

4

6

8

10

CO NY

SC

WA

NE IL

MD

TN MO US

MT

AR

GA

TX WV

NJ

OK PA

NC

MA

KY

MS

DE

NV FL LA MI

RN

W A

uto

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*)

*Latest avaiiable.Sources: NAIC

Michigan was the least profitable state for auto insurers from

2001-2010


46

45.5

22.3

20.6

20.3

19.5

18.6

18.4

18.1

17.6

16.5

15.4

15.3

14.6

13.1

12.7

12.7

12.5

12.5

12.2

11.2

10.5

9.4

19.0

18.0

14.0

0

5

10

15

20

25

30

35

40

45

50

HI SC RI AK CT DC NV DE NY UT MA OR NC CA WA NM VT ME PA ID NJ VA WY AZ MD

RN

W H

O

*Latest available.

Sources: NAIC.

Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*)

Hawaii was the most profitable state for home insurers from 2001-2010 due to the absence

of hurricanes during this period

(Percent) Top 25 States

47

9.2

8.0

6.4

5.0

4.8

4.5

3.4

3.4

0.9

-29

.2

8.0

1.0

-4.4

-5.9

-7.1

-7.1

-7.2

-7.3 -8.3

-8.6

-10

.6

-11

.1

-25

.4

-3.8

-2.6-0

.3

0.4

-40-35-30-25-20-15-10-505

1015

NH CO MT MI US WV KS SD WI IL IA TX FL IN OH AR TN GA KY AL ND OK NE MN MO LA MS

RN

W H

O

*Latest available.Sources: NAIC

Hurricanes Katrina and Rita made Louisiana and Mississippi the least profitable states for home insurers

from 2001-2010

Bottom 25 States(Percent)

Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*)

Global Catastrophe Loss Developments and Trends

48

2011 Will Rewrite Catastrophe Loss and Insurance History

But Will Losses Turn the Market?

49

Global Catastrophe Loss Summary: 2011

2011 Was the Highest Loss Year on Record for Economic Losses Globally

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

$380 Billion in Economic Losses Globally (New Record)

New record, exceeding the previous record of $270B in 2005

$105 Billion in Insured Losses Globally

2011 losses were 2.5 times 2010 insured losses of $42B

Second only to 2005 on an inflation adjusted basis (new record on a unadjusted basis)

Over 5 times the 30-year average of $19B

$72.8 Billion in Economic Losses in the US

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

$35.9 Billion in Insured Losses in the US Arising from 171 CAT Events

Fifth highest year on record

Represents 51% increase over the $23.8 billion total in 2010

Source: Munich Re; Insurance Information Institute.

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Selection of significant loss events (see table)

Natural catastrophes

Earthquake, tsunami Japan, 11 March

EarthquakeNew Zealand, 22 Feb.

Cyclone Yasi Australia, 2–7 Feb.

Landslides, flash floodsBrazil, 12/16 Jan.

Floods, flash floods Australia, Dec. 2010–Jan. 2011

Severe storms, tornadoesUSA, 22–28 April

Severe storms, tornadoesUSA, 20–27 May

WildfiresUSA, April/Sept.

EarthquakeNew Zealand, 13 June

FloodsUSA, April–May

Climatological events(extreme temperature, drought, wildfire)

Number of Events: 820Number of Events: 820

DroughtUSA, Oct. 2010– ongoing

Hurricane IreneUSA, Caribbean22 Aug.–2 Sept.

WildfiresCanada, 14–22 May

DroughtSomaliaOct. 2010–Sept. 2011

FloodsPakistanAug.–Sept.

FloodsThailandAug.–Nov.

Earthquake Turkey23 Oct.

Flash floods, floodsItaly, France, Spain4–9 Nov.

Floods, landslidesGuatemala, El Salvador11–19 Oct.

Tropical Storm WashiPhilippines, 16–18 Dec.

Winter Storm JoachimFrance, Switzerland, Germany, 15–17 Dec.

50Source: MR NatCatSERVICE

Natural Loss Events, 2011

World Map

56

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

(Insured Losses, 2011 Dollars, $ Billions)

*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.**Figures do not include federally insured flood losses.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.

$10.0$11.9 $13.0$13.1

$19.1$21.3

$24.0$25.0

$37.5

$47.6

$7.7 $8.1 $8.3 $8.5 $9.3 $9.7

$0$5

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

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

TyphoonMirielle(1991)

Charley(2004)

ThailandFloods(2011)

Wilma(2005)

NewZealandQuake(2011)

Ike (2008)

Northridge(1994)

SpringTornadoes/

Storms(2011)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 5th

costliest event in global insurance history

5 of the top 14 most expensive

catastrophes in world history have occurred within the past 2 years

59

U.S. Insured Catastrophe Loss Update

2011 Was One of the Most Expensive Years on Record

60

Top 14 Most Costly Disastersin U.S. History

(Insured Losses, 2011 Dollars, $ Billions)

*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.Sources: PCS; Insurance Information Institute inflation adjustments.

$9.0$11.9 $13.1

$19.1$21.3

$24.0 $25.0

$47.6

$8.5$7.7$6.5$5.5$4.4$4.3

$0$5

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

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

SpringTornadoes& Storms*

(2011)

9/11Attack(2001)

Andrew(1992)

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and storm season are

is the 4th costliest event in US insurance history

Hurricane Irene became the 11th most expense

hurricane in US history

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2011Number of Events (Annual Totals 1980 – 2011)

Source: MR NatCatSERVICE 61

37

8

51

2

50

100

150

200

250

300

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

There were 117 natural disaster events in 2011

Losses Due to Natural Disasters in the US, 1980–2011 (Overall & Insured Losses)

62

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

Source: MR NatCatSERVICE © 2011 Munich Re

(2011 Dollars, $ Billions)

2011

Overall Losses: $72.8 Bill

Insured Losses: $35.9 Bill

2011 was the 5th most expensive year on record for insured

catastrophe losses in the US.

Approximately 50% of the overall cost of

catastrophes in the US was covered by insurance in 2011

(Overall and Insured Losses)

64

$1

2.3

$1

0.7

$3

.7 $1

4.0

$1

1.3

$6

.0

$3

3.9

$7

.4 $1

5.9 $

32

.9

$7

1.7

$1

0.3

$7

.3

$2

8.5

$1

1.2

$1

4.1

$3

2.6

$1

00

.0

$1

3.7

$4

.7

$7

.8

$3

6.9

$8

.6

$2

5.8

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??

US Insured Catastrophe Losses

*PCS estimate through Sept. 30, 2011.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.

US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation Adjusted Basis

$100 Billion CAT Year is Coming Eventually

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

$500

$530

$830

$975

$980

$1,000

$1,200

$1,400

$1,510

$2,000

$5,000

$6,900

$7,300

$840

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

Flooding, April*

Wildfire, Sep. 4-19

Thunderstorms, Apr. 19-20

Thunderstorms, Aug. 18-19

Winter Storm, Jan. 31-Feb. 3

Thunderstorms, Jul. 10-14

Texas Drought, 2011*

Thunderstorms, Jun. 16-22




Hurricane Irene, Aug. 26-28**

Thunderstorms, May 20-27


**Includes $700 million in flood losses insured through the National Flood Insurance Program.Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.

2011’s Most Expensive Catastrophes, Insured Losses

Includes $1.65B in AL, mostly in the Tuscaloosa

and Birmingham

areas

Includes approximately $2B in losses

for May 22 Joplin tornado

67

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

*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.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; Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

4.4

9.0

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

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: 6.70*

Combined Ratio Points

U.S. Thunderstorm Loss Trends, 1980 – 2011

68Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

losses are up more than 5 fold since the early 1980s

Hurricanes get all the headlines, but thunderstorms are consistent

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

years on record.

Thunderstorm losses in 2011 totaled a record

$25.8 billion

Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2011

69

Insured winter storm losses in 2011 totaled $2.0 billion. Average winter storm losses have nearly doubled

since the early 1980s

Source: National Forest Service, MR NatCatSERVICE

U.S. Acreage Burned by Wildfires, 1980 – 2011

70

8.3 millions acres were burned by wildfires in 2011, one of the worst years on record, causing

$855 in insured losses

72

U.S. Insured Catastrophe Losses by Cause of Loss, 2011 ($ Millions)

2.8%

1.5%5.6%

72.1%

15.4%

.Source: ISO’s Property Claim Services Unit, Munich Re; Insurance Information Institute.

Hurricanes & Tropical Storms, $5,510

Wildfires, $855

Thunderstorms (Incl. Tornadoes , $25,813

Winter Storms, $2,017

Geological Events, $50, (0.1%)Flood , $535, (1.5%) Other, $1,000

2011’s insured loss distribution was

unusual with tornado and thunderstorm accounting for the

vast majority of loss

Thunderstorm/ Tornado losses were 2.5 times above the 30-year average

74

2011: Nowhere to Run, Nowhere to Hide

Most of the Country East of the Rockies Suffered Severe Weather in 2011, Impacting

Most Insurers

Number of Federal Disaster Declarations, 1953-2011*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 25

42

23

15

24

21

34

27 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

9

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*

*Through December 31, 2011.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

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

The number of federal disaster declarations set a

new record in 2011, with 99, shattering 2010’s record 81

declarations.

There have been 2,049 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

http://www.fema.gov/news/disaster_totals_annual.fema

76

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

86

78

70

65 63

58

55 55 53 53 51 50 50 48 48 47 47 47 46 45 45 44 42 40 39

0

10

20

30

40

50

60

70

80

90

100

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

Dis

aste

r Dec

lara

tions

*Through Dec. 31, 2011.

Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Over the past nearly 60 years,

Texas has had the highest number of Federal Disaster

Declarations


77

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

39 39

36 36 35

33 33

28 27 26 26 25 25 24 24 23 22

20

17 17 16 15 14

11

9 9 9

0

10

20

30

40

50

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

Dis

aste

r Dec

lara

tions

*Through Dec. 31. Includes Puerto Rico and the District of Columbia.

Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Over the past nearly 60 years, Wyoming, Utah and Rhode Island had the fewest number of

Federal Disaster Declarations


78

SPRING 2011 TORNADO & SEVERE STORM OUTBREAK

2011 Losses Are Putting Pressure on US P/C Insurance and Reinsurance Markets

79

1,1

33

1,1

32 1

,29

7

1,1

73

1,0

82 1,2

34

1,1

73

1,1

48

1,4

24

1,3

45

1,0

71 1,2

16

94

1

1,3

76

1,2

64

1,1

03

1,0

98

1,6

92

1,1

56 1,2

82

1,819 1,8

94

552

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

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

Nu

mb

er

of

To

rna

do

es

0

100

200

300

400

500

600

Nu

mb

er o

f De

ath

s

Number of Tornadoes

Number of Deaths

Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.

Number of Tornadoes and Related Deaths, 1990 – 2011

Tornadoes claimed more than 550 lives in 2011, the most since 1925

There were 1,884 tornadoes recorded

in the US in 2011

Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin

Location of Tornadoes in the US, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 81

1,894 tornadoes killed 552 people in 2011, including

at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in

Joplin on May 22

http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html

Insurers Making a Difference in Impacted Communities

Source: Insurance Information Institute 82

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

claims totaling $2 billion in the Tuscaloosa/

Birmingham areas alone.

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

Recovery Fund

Location of Large Hail Reports in the US, 2011


There were 9,417 “Large Hail”

reports in 2011, causing extensive damage to homes,

businesses and vehicles


Location of Wind Damage Reports in the US, 2011


There were 18,685 “Wind Damage” reports through Dec. 27, causing

extensive damage to homes and,

businesses


Severe Weather Reports, 2011

85Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

There were 29,996 severe

weather reports in 2011;

including 1,894 tornadoes;

9,417 “Large Hail” reports

and 18,685 high wind events


87

Underwriting Trends: Cycle, Catastrophes Are Among

2011 and 2012 Drivers

88

P/C Insurance Industry Combined Ratio, 2001–2011:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO.

95.7

99.3100.8

108.2

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*

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Underwriting Gain (Loss)1975–2011*

* Includes mortgage and financial guaranty insurers in all yearsSources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

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

Cumulative underwriting deficit from 1975 through

2010 is $455B

($ Billions)Underwriting losses in

2011 at $34.9

through Q3 will be

largest since 2001

92

Performance by Segment:Personal Lines

Homeowners Insurance Combined Ratio: 1990–2012F

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

94

.4 10

0.3

88

.9 95

.6

11

6.8

10

5.7

10

6.7 11

6.0

10

8.01

18

.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P12F

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

Local Catastrophe Loss Activity

Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P/12F).

Private Passenger Auto Combined Ratio: 1993–2012P

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.2

10

1.3

10

1.0

10

1.0

10

2.0

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

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

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

Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P/12F).

95

Cycle Drivers

The Role of Losses and Reserves in the Underwriting Cycle

96

PP Auto Liability: Loss and LAE vs. Net Premiums Written, 1990-2010

70

75

80

85

90

95

1009

0

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

Lo

ss

+ L

AE

Ra

tio

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Ch

an

ge

in N

PW

Loss & LAE Ratio NPW Growth

Source: A.M. Best; Insurance Information Institute

Historically, losses drive

premium growth (which is

primarily driven by rate)

While Premium Growth Decelerated, the Driver Was Primarily Lower Losses, Allowing Auto Insurers to Maintain String Margins

102

REINSURANCE MARKET CONDITIONS

Record Global Catastrophes Activity is

Pressuring Pricing

Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011.

Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—2Q11

Most excess reinsurance capacity was

removed from the market in 2011,

leaving uncertainty as to the direction of

2012 reinsurance renewals

Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.

Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11)

A modest increase in global property catastrophe reinsurance pricing was

evident in June 1 renewals in the wake of record global catastrophe

losses. Larger increase could occur for the Jan.1, 2012 renewals

109

Claim Trends in Auto Insurance

Rising Costs Held in Check by Falling Frequency:

Can That Pattern Be Sustained?

110

Bodily Injury: Severity Trend Rising, Frequency Decline Has Ended

3.5%

-5.4%

-3.8% -4.0% -4.2%

-2.2%

0.0%

2.2%2.9%

4.7%5.7% 5.9%

2.1%3.2%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011*

Severity Frequency

*For 2011, data are for the 4 quarters ending with 2011:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

Annual Change, 2005 through 2011*

Cost Pressures Will Increase if BI Severity Frequency Increases Continue

111

Property Damage Liability: Severity is Up, Frequency Nearly Flat Since 2009

3.0%

-1.6%

-3.5%

0.9%

-3.4%

0.6%

-0.3%

-1.2%

2.9%3.6%

2.0% 2.0%

-0.3%

0.8%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2005 2006 2007 2008 2009 2010 2011*

Severity Frequency


Severity/Frequency Trends Were Stable Through 2010, But Rising Severity in 2011 Is a Concern

*For 2011, data are for the 4 quarters ending with 2011:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

112

No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*

3.7%

-4.8%-5.7%

-4.1%

-5.7%

5.3% 5.0%

-0.7%

4.7%

2.4%

6.4% 6.5% 6.2%5.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011*

Severity Frequency

*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2011:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute


Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ

113

Collision Coverage: Frequency and Severity Trends Are Up in 2011*

2.0%

-1.8%

-3.6%

2.5%

-2.4%-1.6%

-0.2%

0.4%

3.9%3.1%

0.1%0.5%

-2.3%

-0.1%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2005 2006 2007 2008 2009 2010 2011*

Severity Frequency


The Recession, High Fuel Prices Have Helped Temper Frequency and Severity, But this Trend Will Likely Be Reversed Based on

Evidence from Past Recoveries*For 2011, data are for the 4 quarters ending with 2011:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

114

Comprehensive Coverage: Frequency and Severity Trend in 2011 is Unfavorable

18.3%

-3.1%

-9.8%

-6.3%

1.8% 1.8%

5.8% 6.1%

15.5%

-1.4% -1.5%

12.6%

-8.2%-6.0%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010 2011*

Severity Frequency


Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper

Severity, But This Factors Will Weaken as Economy Recovers*For 2011, data are for the 4 quarters ending with 2011:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

Severe weather is a principal cause of the

spike in both frequency and severity in 2011

115

Average No-Fault Claim Severity, 2011:Q3*

$1

7,6

64

$9

,10

8

$8

,01

9

$5

,04

2

$5

,16

0

$4

,19

4

$2

,91

9

$2

,22

1

$1

,86

8

$3

6,2

29

$7

,19

4

$5

,51

0

$4

,61

5$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

MI NJ FL NY MN KY DC HI ND PA KS UT MA

Several States Including NY Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.

*Average of the four quarters ending 2011:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute.

MI, NJ, NY and FL currently are the largest states that have the most severe

problems in their no-fault system

NY has the 4th highest auto no-fault average claim cost (severity) in the US

116

Increase in No-Fault Claim Severity: Selected States, 2004-2011*

*2011 figures are for the 4 quarters ending 2011:Q3. Sources: Insurance Information Institute research from ISO/PCI Fast Track data.

$36,229

$17,664

$8,019 $9,108$7,194

$5,198$6,674$5,871

$12,136

$24,385

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Michigan New Jersey New York Florida Minnesota

2004 2011*

The no-fault systems in MI, NJ, NY, FL, and MN are under stress due to rising fraud and abuse, which leads to higher premiums for honest drivers.

+48.6%

+45.6%

+36.6% +36.5% +38.4%

117

Florida’s No-Fault Fraud Tax: Estimated Aggregate Annual Cost, 2009-2011E ($ Millions)

$657.6$617.3

$297.0

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2009 2010E 2011F

Fra

ud

Ta

x (

$ M

illio

ns

)

*2011 estimate is based on data through Q2:2011.Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data.

Unscrupulous Medical Providers and Attorneys Are Costing Honest Florida Drivers Hundreds of Millions of Dollars

The total fraud tax levied on Florida vehicle owners

is an estimated $658 million in 2011.

+107.6% +6.5%

118

New York State No-Fault Claim Frequency and Severity, 1997–2011:Q3

$5,6

75 $6,0

63$6

,699

$8,3

47$8

,327

$7,8

88$7

,507

$8,2

34$9

,235

$8,7

27$8

,577

$7,7

73$7

,311

$6,9

58$6

,870

$6,1

56$6

,052

$5,8

20$5

,991

$5,6

15$6

,094

$5,9

14 $6,2

50$6

,269 $6

,530

$6,6

06$7

,063 $7

,323

$7,3

78$7

,297 $7

,670

$7,7

40$8

,443

$8,1

77 $8,5

07$8

,025

$8,5

63$8

,726

$8,6

46$8

,830

$8,6

46 $8,9

90$8

,647

$8,4

07

$8,2

85$8

,062

$7,3

94

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

1997

1998

1999

2000

1:01

1:02

1:03

1:04

2:01

2:02

2:03

2:04

3:01

3:02

3:03

3:04

4:01

4:02

4:03

4:04

5:01

5:02

5:03

5:04

6:01

6:02

6:03

6:04

7:01

7:02

7:03

7:04

8:01

8:02

8:03

8:04

9:01

9:02

9:03

9:04

10:0

110

:02

10:0

310

:04

11:0

111

:02

11:0

3

No

-Fa

ult

Cla

im S

ev

eri

ty

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

No

-Fa

ult C

laim

Fre

qu

en

cy

Avg. Claim Severity

Frequency

About 10% of No-Fault Claim Costs in 2011 Were Estimated to Be Attributable to Fraud and Abuse

No-Fault Claim Severity

Claim Severity nearly reached a record high

in 2010:Q2: $8,990

Avg. Claim Severity Rose 63% in 5 years

after 1997 Presbyterian

Decision

Avg. Claim Severity is up 44% since 2004:Q4 though 2011:Q3

Claim Frequency was up 27% in 2011:Q1 from

2008:Q3

*2011 figure is based on data for the 4 quarters ending Q3:2011.Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.

120

Distribution Trends

Distribution by Channel Type Continues to Evolve

121

All P/C Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

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

Direct Independent Agents

Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained or held

generally steady in recent years. Direct channels include exclusive agency companies, direct

marketers and direct sales (e.g., internet)

122

Personal Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

80%

72 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

Direct Independent Agents

Independent agents have lost significant personal lines market share since the early 1970s. Although the trend has slowed, it may be

accelerating again.

124

P/C Insurance Industry Financial Overview

Profit Recovery Was Set Back in 2011 by High Catastrophe

Loss & Other Factors

P/C Net Income After Taxes1991–2011:Q3 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

4,6

70

$7

,97

9

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS1 = 1.9%

P-C Industry 2011:Q3 profits were down 71% to $8.0B vs. 2010:Q3,

due primarily to high catastrophe losses and as non-cat

underwriting results deteriorated

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

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

Combined Ratio / ROE

* 2008 -2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011:Q3 combined ratio including M&FG insurers is 109.9, ROAS = 1.9%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.8

108.2

95.7

3.0%

7.5%7.4%4.4%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011:Q3*0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

A combined ratio of about 100 generated ~5.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*

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

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS through Q3 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2011:3.0%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

P/C Premium Growth Cycles

131

Cyclicality is Driven Primarily by the Industry’s Underwriting

Cycle, Not the Economy

132

-5%

0%

5%

10%

15%

20%

25%

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

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

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

*2011 figure is through first 9 months vs. same period in 2010 Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

NWP was up 0.9% in 2010

2011:Q3 growth

was +3.1%

133

P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter

Sources: ISO, Insurance Information Institute.

Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

3%3.

5%1.

6%4.

1%

-10%

-5%

0%

5%

10%

15%

20%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

Through 2011:Q3, growth in personal lines

predominating cos. (+3.1%) and commercial lines predominating cos.

(+3.9%), diversified (+2.3%)

Capital/PolicyholderSurplus (US)

144

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

146

Policyholder Surplus, 2006:Q4–2011:Q3

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$556.9 $559.1

$538.6

$564.7

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

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

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2011:Q1 Peak

11:Q2: -$5.6B (-1.0%)

11:Q3: -$26.1B (-4.6%)

Surplus as of 9/30/11 was down 4.6% below its all

time record high of $564.7B set as of 3/31/11. Further

declines are possible.

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.

The Industry now has $1 of surplus for every $0.83 of NPW, close to the strongest claims-

paying status in its history.

INVESTMENTS: THE NEW REALITY

155

Investment Performance is a Key Driver of Profitability

Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q31

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$52.9

$42.0

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:Q3

Investment Gains through Q3:2011 Were Surprisingly Robust. Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains;

The Financial Crisis Caused Investment Gains to Fall by 50% in 2008

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

($ Billions)

Investment gains through Q3:2011 were $2.1B above the

same period in 2010—a surprise given falling rates

and flat stock markets

160

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

0.00% 0.01% 0.05% 0.12% 0.26%

1.43%

1.98%

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

0.89%

0.39%

2.98%2.67%

0%

1%

2%

3%

4%

5%

6%

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

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

Treasury yield curve remains near its most depressed level

in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2014.

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through 2013 and Possibly into 2014

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

161

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

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

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

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

Financial Strength & Underwriting

163

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

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20118

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15 16 1

9 21

28

5

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

Source: A.M. Best Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute.

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

3 small insurers in Missouri did encounter

problems in 2011 following the May

tornado in Joplin. They were absorbed by a

larger insurer and all claims were paid.

166

Reasons for US P/C Insurer Impairments, 1969–2010

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

169

The Economic Storm

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

Exposure Base, Growth and Profitability

170

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 1/12; Insurance Information Institute.

2.7

%0

.9%

3.2

%2

.3%

2.9

%-0

.7%

0.6

%-4

.0%

-6.8

% -4.9

%-0

.7%

1.6

%5

.0%

3.9

%3

.8%

2.5

%2

.3%

0.4

%1

.3%

1.8

% 2.8

%2

.0%

2.3

%2

.3%

2.7

%2

.6%

2.7

%2

.8%

3.0

%4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing

slump, labor market contraction has been

severe but modest recovery is underway

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

2011 got off to a sluggish start, but growth is

expected to proceed at a modest pace in 2012-2013

172

Labor Market Trends

Massive Job Losses Sapped the Economy and Personal/Commercial

Lines Exposure, But Trend is Improving

173

Unemployment and Underemployment Rates: Stubbornly High in 2011, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 8.5% in

December

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

Peak rate in the last 30 years:

10.8% in November -

December 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 15.2%

in Dec. 2011

January 2000 through December 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market might finally be improving

Dec 11

186

7921

365

127

42 15-1

09-1

465 97

23-1

2-8

5 -58

-161

-253 -230

-257

-347

-456

-547

-734 -6

67-8

06-7

07-7

44-6

49-3

34-4

52-2

97 -215 -186

-262

75-8

316

62

229

51 6111

714

311

2 193

128 16

794

261

219

241

99 7517

372

220

120

134 21

2

144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

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-

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-0

8Ju

n-08

Jul-0

8A

ug-0

8S

ep-0

8O

ct-0

8N

ov-0

8D

ec-

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-

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-

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-

Monthly Change in Private Employment

January 2008 through December 2011* (Thousands)

Private Employers Added 3.343 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

212,000 private sector jobs were created in

December

http://www.bls.gov/ces/home.htm

176

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

13.0

11.3

10.6

10.5

10.5

10.0

10.0

10.0

9.9

9.9

9.8

9.4

9.1

9.1

9.1

9.0

8.7

8.7

8.7

8.7

8.5

8.5

8.4

8.2

8.1

8.0

0

2

4

6

8

10

12

14

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

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for November 2011, seasonally adjusted.

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

In November, 43 states and the District of Columbia reported over-the-month unemployment rate decreases, 3 had

increases, and 4 had no change.

177

8.0

8.0

7.9

7.9

7.6

7.3

7.3

7.1

7.0

7.0

6.9

6.9

6.5

6.5

6.5

6.4

6.2

6.1

5.9

5.8

5.7

5.3

5.2

4.3

4.1

3.4

0

2

4

6

8

10

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

Une

mpl

oym

ent R

ate

(%)

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

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

In November, 43 states and the District of Columbia reported over-the-month

unemployment rate decreases, 3 had increases, and 4 had no change.

Inflation

179

Is it a Threat to Claim Cost Severities?

180

Annual Inflation Rates, (CPI-U, %),1990–2017F

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.1 2.12.4 2.4 2.4 2.5

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 1/12 (forecasts).

The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and

commodity prices, plus U.S. debt burden, remain longer-run concerns

Annual Inflation Rates (%)

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

commodity bubble reduced inflationary pressures in 2009/10

Higher energy, commodity and food

prices pushed up inflation in 2011, but

not longer turn inflationary

expectations.

P/C Personal Insurance Claim Cost Drivers Grow Faster Than the Core CPI Suggests

Sources: Bureau of Labor Statistics; Insurance Information Institute.

3.2%

1.7%

6.8%

5.1%

4.2%

3.0% 3.2%

5.0%

7.1%

0%

2%

4%

6%

8%

Overall CPI "Core" CPI InpatientHospitalServices

OutpatientHospitalServices

PrescriptionDrugs

Medical CareCommodities

LegalServices

Motor VehicleParts &

Equipment

ResidentialMaint. &Repair

Price Level Change, 2011 vs. 2010

Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least

182

Excludes Food and Energy

Regulatory Environment & Financial Services Reform

184

State Regulatory Environments Vary Tremendously and Can

Impact Insurer Profitability and Ability to Compete

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI B

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

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

Source: Heartland Institute, May 2011

B B+

B+

D

B

C-

B-

B+

B+C-

B+C-

B

C+

C-

C-

B- D-

B

F

D

C-

C-C+

B+

B+

B+

A+

A+

C-

B

A

A

B

C+

C+

B-

B-

C+

C

F

D+F

D+

B

C+

F F

D-

2010 Property and Casualty InsuranceRegulatory Report Card

Not Graded: District of Columbia

Pennsylvania’s regulatory environment got a grade of

“C” in 2010

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online:

personal lines p-c insurance markets: trends, challenges & opportunities for 2012 & beyond...

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