The RMI Top 10 for 2020

Robert P. Hartwig, PhD, CPCUClinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ¨ University of South CarolinaRobert.Hartwig@moore.sc.edu ¨ 803.777.6782

Gamma Iota Sigma Lambda ChapterUniversity of South Carolina

Columbia, SCFebruary 25, 2020

2

#10PANDEMIC RISK

P/C Insurance Exposures Are Minimal

L/H Exposures Are Manageable

2

qCorona Virus§ First detected in Wuhan region of

China in mid-Dec. 2019§ Rapidly spread within China and

now outside China

q What are the insurance implications of the virus?§ What types of insurance are

impacted?§ Does coverage apply?§ How much?

Corona Virus: A Case Study in CoverageWHO Corona Virus Situation Summary as of Feb. 25, 2020

Source: World Health Organization accessed 2/25/20 at: https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200225-sitrep-36-covid-19.pdf?sfvrsn=2791b4e0_2

Corona Virus: A Case Study in Coverage

Source: World Health Organization accessed 2/25/20 at: https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200225-sitrep-36-covid-19.pdf?sfvrsn=2791b4e0_2

qWhat type of insurance might be impacted?

qDoes coverage apply?

qWhy or why not?

Corona Virus: A Case Study in Coverage

qThis coronavirus outbreak has the potential to become an eligible event under the terms of the World Bank’s pandemic catastrophe bond, should the outbreak meet certain pre-defined criteria

qThe World Bank’s $320 million IBRD CAR 111-112 catastrophe bond provides a source of insurance or reinsurance capital to back the Pandemic Emergency Financing Facility (PEF).

qFor an outbreak of a pandemic to qualify and become an eligible event under the terms of the World Bank’s pandemic catastrophe bond, it needs to meet a certain level of severity related criteria, in terms of duration of the outbreak, the number of confirmed deaths reported, its spread geographically and also a growth rate factor in terms of how quickly the outbreak is spreading.

Corona Virus: CAT Bond Impact?

Source: Artemis accessed 2/4/20 at: https://www.artemis.bm/news/china-most-likely-coronavirus-source-for-world-banks-pandemic-cat-bond/

7

#9TORT ENVIRONMENT

The Return of Social Inflation?

7

Tort Costs Are Under Pressure from a Variety of Different Factors

Average Jury Awards, 1999 – 2017 (latest available)

$725 $747 $756$800 $799

$1,018$1,022$950

$1,077$1,046

$654

$806

$1,098$1,010$1,042

$1,132

$1,355

$1,847

$500

$700

$900

$1,100

$1,300

$1,500

$1,700

$1,900

$2,100

1999 2001 2003 2005 2007 2010 2012 2014 2016

Source: Jury Verdict Research; Risk and Uncertainty Management Center, Univ. of South Carolina.

The average jury award reached an all-time record high in 2017.

Median Award = $50,000 (also a record)

The Nation’s Judicial Hellholes: 2019 – 2020

9Source: American Tort Reform Association; Risk and Uncertainty Management Center, Univ. of South Carolina.

Florida

IllinoisCook, Madison

& St. Clair Counties

Louisiana

Watch Listn CO Supreme Courtn Floridan MD General Assem.n MT Supreme Courtn PA Supreme Courtn WV Supreme Ct.

Dishonorable Mention

n AK Supreme Courtn KS Supreme Courtn OR Supreme Court

Minnesota Supreme Ct./Twin

Cities

NYC

St. LouisPhiladelphia

Court of Common Pleas

New Jersey Legislature

Oklahoma

California

Defense Costs and Cost Containment Expense as a Percent of Incurred Losses ($000), 2016 - 2018

Note: Figures are net of reinsurance and exclude state funds.Source: NAIC sourced from S&P Global Markets; Ins. Info, Inst.; Risk and Uncertainty Management Center, Univ. of South Carolina.

Personal Auto has seen the sharpest increase in

recent years

Shareholder Class Action Lawsuits*

Source: Stanford University School of Law (securities.stanford.edu); Risk and Uncertainty Management Center, Univ. of South Carolina.

164 202

163231

188

111173241

209 216

498

266

227 238

182

119 17

6 222

168

175 188

151 165

168 208271

412

402

404

0

100

200

300

400

500

600

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 16 17 18 19

Shareholder litigation is surging, in part due to suits associated with M&A activity. Major

implications for D&O coverage.

IPO FlopsCyber

Increase in M&A

12

#8CYBER RISK &

TECHNOLOGICAL DISRUPTION

The 4th Industrial Revolution

12

Data Breaches 2005-2019*, by Number of Breaches and Records Exposed

# Data Breaches

*Through Nov. 2019.Source: Identity Theft Resource Center.

Millions of Records Exposed

13

The number of data breaches and

records exposed is generally rising

157321

446

656498

419 447

1091

1632

12441338

662783 780

619

197.6163.7

127.7

16.2

222.5

66.9

19.135.7

22.9 17.3

87.9 85.6

177.9

366

446.5

100

300

500

700

900

1100

1300

1500

1700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*0

50

100

150

200

250

300

350

400

450

# Data Breaches # Records Exposed (Millions)

Data/Privacy Breach:Many Potential Costs Can Be Insured

Source: Zurich Insurance.

Data Breach Event

Costs of notifying affecting

individuals Defense and settlement

costs

Lost customers and damaged

reputation

Cyber extortion payments

Business Income Loss

Regulatory fines at home & abroad

Costs of notifying

regulatory authorities

Forensic costs to discover

cause

14

The Pace of New Data Creation is Growing Exponentially

*A zettabyte is 1021 bytes of information and is equal to 1 trillion gigabytes.Source: IDC, Swiss Re, Sigma 4/2019 at: https://www.swissre.com/institute/research/sigma-research/sigma-2019-04.html; USC RUM Center.

CAGR (2019 – 2025)Real-Time Data: 39%

Non-Real Time Data: 24%

Zettabytes*By the early 2030s, Real Time Data

creation will exceed Non-Real Time for the first time ever—mostly automatically, inexpensively

and non-intrusively via

sensors, transaction records and social media

platforms

16

Example:Autonomous Vehicles: Will Insurers Drown in the Data?

n The average human by 2020 will generate about 1.6GB in data every day

n The average autonomous vehicle will process about 4,000GB per day—as much as nearly 2,700 humans

n Are insurers ready for this?

Source: Intel Corp.

Estimated Distribution of P/C Insurer IT Spend, by Category, 2019

Source: IDC, Swiss Re, Sigma 4/2019 at: https://www.swissre.com/institute/research/sigma-research/sigma-2019-04.html; USC Risk and Uncertainty Management Center.

Data and analytics projects account for an estimated 15% of P/C

insurer IT spend in 2019

Zettabytes (1ZB = 1021 bytes)• Global P/C and L/H IT

spend is estimated at $220B in 2019 (Gartner)

• Of that $220B, 8-10% is estimated to be outlays for data and analytics (Swiss Re)

• Equates to ~3% of global insurance industry’s expense base (expense ratio assumed to be 15% of global premiums of $5.3 trillion)

18

The Internet of Things and the Insurance Industry Value Chain

Source: Willis Capital Markets & Advisory; Risk and Uncertainty Management Center, University of South Carolina.

Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider?

19

InsurTech Funding Volume, All Stages2012:Q1 – 2019:Q2

Source: Willis Towers Watson, Quarterly InsurTech Briefing, Q2 2019; Risk & Uncertainty Management Center, University of South Carolina.

InsurTechfunding

remains close to historic

highs

P/C accounts

for ~70% of InsurTechfunding

Wide Variety of Investors in InsurTech

Source: CB Insights,Quarterly InsurTech Briefing,, Q1 2018; Univ. of South Carolina, Center for Risk and Uncertainty Management.

Sampling of (Re)Insurer Investors

Sampling of Other Corporate VC Investors

#7INVESTMENTS

Investment Performance Is a Key Driver of Insurer Profitability

Persistently Low (and Falling) Interest Rates, Stock Market Volatility Are

Concerns

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%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 16 18 20*

,*Through Feb. 25, 2020.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina

Tech Bubble Implosion

Financial Crisis

Annual Return

Energy Crisis

S&P 500 Index Returns, 1950–2020*

Fed Raises Rates

2020 YTD-3.2%

2019: +28.9%2018: -6.2%2017: +19.42016: +9.5

US Treasury Security Yields:A Long Downward Trend, 1990–2019*

*Monthly, constant maturity, nominal rates, through Dec. 2019.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'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 '16'17'18 '19

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year US Treasury Notes have been essentially

below 5% for more than a decade

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

Fed tightening has pushed ST rates higher in late 2018,

but fears of a weakening economy have pushed yields down and narrowed the 2-10 yield spread substantially. These factors will pressure insurer earnings and thus rates in the months and

years ahead.

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*

4.4

4.0

4.6 4.5

3.7 3.83.7

3.43.7

3.2 3.1 3.1 3.2 3.1 3.1

4.6

4.23.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19E 20F

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in

yields, but rate cuts in 2019 will preclude future gains

Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.

(Percent) Investment yields remained depressed--

down about 150 BP from pre-crisis levels.

25

#6CATASTROPHE LOSSES

CAT Losses for the Decade Just Ended Were Up Materially—Costliest Ever

Primary, Reinsurance and Retro MarketsAll Impacted and Are Pressuring Rates

25

U.S. Inflation-Adjusted Cat Losses

Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

4037

79

104

53

1980s:$5 B

1990s: $15 B

2000s: $25 B2010s: $35 B

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

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 16 17 18

Bill

ion

s, 2

01

8 $

Average forDecade Hurricane

Andrew WTC

Katrina, Rita, Wilma

2018 – Third worst year for U.S. Insured Catastrophe Losses. Average Insured Loss per Year for 1980-2019 is $19.8 B.

Harvey, Irma, Maria

36

19

Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1

27

(Insured Losses, 2017 Dollars, $ Billions)*

$9.3 $9.7 $10.0$11.7$14.2$14.2$15.9

$18.0$19.8$21.9

$25.3$26.0$27.1

$51.6

$5.9 $6.0 $7.1 $7.5 $7.9 $8.3

$0

$10

$20

$30

$40

$50

$60

Jeanne(2004)

Frances(2004)

Rita (2005)

Torn./T-Storms (2011)

Torn./T-Storms (2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Michael(2018)

Wilma(2005)

Camp Fire(2018)

Ike (2008)

Harvey (2017)

Irma (2017)

Sandy(2012)

Maria (2017)

Northridge(1994)

9/11 (2001)

Andrew(1992)

Katrina(2005)

8 of the top 20 mostly costly insured events in US history occurred during the 2010s

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004

*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.

28

0

50

100

150

200

250

300

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 16 17 18 1920E

(Percent)

US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions

Post-Andrew surge

US Property Catastrophe Rate-on-Line Index: 1990 – 2020E*

*As of January 1 each year.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index

Post-9/11 Adjustment

Post Katrina, Rita, Wilma

period

Post-Ike adjustment Adjustment

following record tornado losses in 2011 and Sandy in

2012

Record CATs in 2017 and high CAT losses in 2018 pressured US

reinsurance prices in recent years (+3.3% in 2019, +6.4% in 2018,

+4.0% in 2020E)

2020 Global RoL+5%

#5THE ECONOMY

The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure Base Across Most Lines

The Links Between the Economy and the P/C Insurance Industry Are Strengthening

Politics and Economics Are Inextricably Linked As Well

US Real GDP Growth*

* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 1/20; Center for Risk and Uncertainty Management, University of South Carolina.

2.7%

1.8%

-1.3%

-2.8%

2.5%

2.2% 2.7%

4.5%

0.8% 1.4%3.5%

2.1%

1.2%3.1% 3.2%

2.9%

2.5% 3.5%

2.9%

1.1%3.1%

2.0% 2.3%

1.2%2.9%

2.2%

2.3%

2.1% 2.2% 2.4%

2.4%

1.6% 2.1%

1.8%

4.1%

1.1% 1.8% 2.5% 3.6%

3.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2000

2001

2002

2003

2004

2005

2006

2007

20

0820

0920

1020

1120

1220

1320

1420

1516

:1Q

16:2

Q16

:3Q

16:4

Q17

:1Q

17:2

Q17

:3Q

17:4

Q18

:1Q

18:2

Q18

:3Q

18:4

Q19

:1Q

19:2

Q19

:3Q

19:4

Q20

:1Q

20:2

Q20

:3Q

20:4

Q21

:1Q

21:2

Q21

:3Q

21:4

Q

Demand for Insurance Should Increase in 2019 as GDP Growth Continues at a Steady Pace and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

“Great Recession”

began in Dec. 2007

Financial Crisis

2018 GDP benefited from tax reform, but effects

wane in 2019-2020

Tax cuts help jolt growth from early 2018 to Q1 2019, but effects eventually waned.

Trade war, weaker global growth are adversely affecting US GDP growth in

2019/20.

The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2019:Q3

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

2014:Q3

2015:Q1

2015:Q3

2016:Q1

2016:Q3

2017:Q1

2017:Q3

2018:Q1

2018:Q3

2019:Q1

2019:Q3

DWP y-o-y change y-o-y nominal GDP growth

DWP and GDP growth both appear to have decelerated

through Q3 2019

Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably

linked to economic performance.

US Unemployment Rate Forecast: 2007:Q1–2021:Q44.5%

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%

5.2%

5.0%

4.9%

4.9%

4.9%

4.7%

4.7%

4.4%

4.3%

4.1%

4.1%

3.9%

3.8%

3.8%

3.9%

3.6%

3.6%

3.5%

3.6%

3.5%

3.6%

3.6%

3.6%

3.5%

3.6%

3.6%

9.6%

3%

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

17:Q1

17:Q2

17:Q3

17:Q4

18:Q1

18:Q2

18:Q3

18:Q4

19:Q1

19:Q2

19:Q3

19:Q4

20:Q1

20:Q2

20:Q3

20:Q4

21:Q1

21:Q2

21:Q3

21:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

= actual; = forecastsSources: US Bureau of Labor Statistics; Wells Fargo Securities (1/20 edition); Risk and Uncertainty Management Center, University of South Carolina.

The unemployment rate is expected to remain

below 4% through 2021 but trade war could change this outlook.

At 3.6%, the unemployment

rate is close to its lowest reading in

50 years.

New Private Housing Starts, 1990-2025F

1.48

1.47 1.62 1.64

1.57 1.60 1.71 1.85 1.96 2.07

1.80

1.36

0.91

0.55 0.59 0.610.78 0.92 1.00 1.11 1.17 1.20 1.25

1.25 1.27 1.33 1.35 1.41 1.45

1.45

1.351.46

1.29

1.20

1.011.19

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 15 16 17 18 19 20F21F22F23F24F25F

Source: U.S. Department of Commerce; Wells Fargo Securities (1/20 for 2020-21F), Blue Chip Economic Indicators (3/19 for 2022-25F); University. of South Carolina, Center for Risk and Uncertainty Management..

Insurers 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 mortgage rates, strained inventories of existing homes, and demographics should continue to

stimulate new home construction, but higher mortgage rates and a slowing economy will slow the pace of growth

(Millions of Units)

NFIB Small Business Optimism Index:Jan. 1988–Dec. 2019

Source: National Federal of Independent Business; Wells Fargo Research.

Outlook: Small businesses are cautiously optimistic about the future

Trade wars and associated uncertainty introduced significant uncertainty in to the

markets in 2019. Corona Virus could have a more limited

impact in 2020

Small Business Optimism weakened in 2019 on fears of greater economic uncertainty (esp.

trade war fears). Tax reform, reduced regulations and

strong sales have driven investment,

hiring and exposures.

35

#4POLITICS & REGULATION

35

Politics and Insurance: A Difficult History, A Challenging and Uncertain Future

What Will Happen in 2020?

Source: National Association of Mutual Insurance Companies (NAMIC), Jan. 2020.

37

Trumponomics: The Essential Elements

n6 Elements wTax ReformwDeregulationw Infrastructure InvestmentwHealthcare wTradew Immigration

Reform/Enforcement

n Most of these have direct impacts for insurers

Insurance Lobbyist View on Outcome of 2020 Election

Source: National Association of Mutual Insurance Companies (NAMIC), Jan. 2020.

39

#3GROWTH

Profitable Growth is the Key to Long-Run Success

39

Net Premium Growth (All P/C Lines): Annual Change, 1971—2019F

40

-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 14 15 16 17 18 19F

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

*Figure is actual 2018:9M vs. 2017:9M change adjusted for affects of the TCJA of 2017. Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina estimate for 2019.

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.

2019F:3.0%2018E: 10.8%

2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

Outlook2019F: 3.0%2020F: 3.8%

-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 15 17 19F

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 22.4%

Great Recession:2009: -9.0%

ROE

2019E: +3.1%

Commercial Lines NPW Premium Growth:1975 – 2019F

Recessions:1982: 1.1%

Commercial lines is prone to far more cyclical volatility that

personal lines.

1988-2000: Period of

inter-cycle stability

Commercial lines premium

growth has been sluggish

for years, reflecting weak

pricing environment.

Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

2016: -1.1%

2018: +14.4%

42

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2018 (1)

$5,100

$11,534

$8,059

$30,873

$19,118

$40,032

$1,249

$486

$20,353

$425

$9,264

$35,221

$13,615

$16,294

$3,507 $6,419

$12,458

$4,685

$4,393

$6,723

$39,970

$10,665

$7,404

$17,068

$55,825

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Tran

sact

ion

valu

es

0

20

40

60

80

100

120

140

Num

ber of transactions

($ Millions)

(1) Includes transactions where a U.S. company was the acquirer and/or the target.

Source: Conning proprietary database.

M&A activity in the P/C sector in 2015 totaled $40B, its highest level

since 2000, but fell sharply in 2016/17 in

dollar terms

Major 2018 Deals:AIG/Validus: $5.56B

Axa/XL: $15.3BApollo/Aspen: $2.6B

43

#2RATE ADEQUACY

Pricing Pressures Are Intense but Rational

43

CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2019:Q3*

44

-0.1% 0.9% 2.7

% 4.4%

4.3%

3.9% 5.0%

5.2%

4.3%

3.4%

2.1%

1.5%

-0.5%

0.1%

-0.7%

-2.3%

-3.3%

-3.1% -2.8%

-3.7%

-3.9% -3.2%

-3.3% -2.5%

-2.8% -1.3%

0.3% 1.7% 2.4% 3.5% 5.2% 6.2%

-2.9%

1.6%

1.5%

-16%

-11%

-6%

-1%

4%

9%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

2Q19

*Latest available.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Largest increase since 2003 for some accounts

(Percent)

Renewals turned positive in late 2011

in the wake of record tornado

losses and Hurricane Sandy

Poor results in 2017/18 seem to have exerted enough

pressure on markets to push overall rates up by +6.2% as

of Q3 2019

Change in Commercial Rate Renewals, by Line: 2019:Q3

45Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

3.2% 3.3% 3.7% 4.4% 4.6% 5.0%

8.8% 9.1% 9.8%

-2.3%

0.6% 0.8% 1.4% 1.7% 2.3%

-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

10.0%12.0%

Wor

kers

Com

p

Sur

ety

Terro

rism

Cyb

er

Bro

ker E

&O

Mar

ine

EP

L

Floo

d

Bus

ines

sIn

terru

ptio

n

Con

stru

ctio

n

Gen

eral

Liab

ility

D&

O

Com

mer

cial

Pro

perty

Com

mer

cial

Aut

o

Um

brel

la

Commercial Property, Business Interruption,

Flood are reflecting record CAT losses and

pressure from reinsurance markets

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

Umbrella now leads all major commercial lines in terms of rate gains, exceeding Commercial Auto and CP for

the first time in Q3 2019

46

#1PROFITABILITY

Above All Else, Insurers Need Consistent Profitability Over the Long-Run

46

P/C Industry Net Income After Taxes, 1991–2019F*n 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%n 2018 ROAS = 8.0%n 2019: ROAS = 8.2%

*2019 estimate based on annualized actual Q3:19 figure of $48.075B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). Sources: A.M. Best, ISO.

$14,178

$5,840$19,316

$10,870 $20,598

$24,404 $36,819

$30,773

$21,865

$3,046

$30,029

$62,496

$3,043

$35,204

$19,456 $3

3,522

$63,784

$55,870

$56,826

$42,924

$36,813

$59,994

$64,100

$38,501

$20,559

$44,155

$65,777

-$6,970

$28,672

-$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 15 16 17 18 19*

Net income is up sharply in

2018/19 due to lower CATs

and the TCJA

$ Millions

ROE: Property/Casualty Insurance by Major Event, 1987–2019E

48

*Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; A.M. Best (2018E-2019F); USC RUM Center.

-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 15 16 17 18 19E

P/C Profitability Is Influenced Both by

Cyclicality and Volatility

Hugo

Andrew, Iniki

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Harvey, Irma, Maria,

CA Wildfires

2019E 8.2%

-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 16 17 18 19E

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2019E

Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, A.M. Best, USC RUM Center.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

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

10 Years10 Years

9 Years

High CAT losses caused ROE to plunge in 2017 but

rebounded in 2018/19 due to lower CATs and the TCJA.

ROE

1975: 2.4%

2013 9.8%

2017 5.0%

2015: 8.4%

2019E 8.2%

2018 8.0%

-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 16 17 18 19E

P/C Insurance ROE vs. Fortune 500, 1975–2019E*

*2018 Fortune 500 figure is an estimate.Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, Fortune.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

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

ROE

1975: 2.4%

2013 9.8%

2017 5.0%

2019E 8.2%

Average: 1975-2018 Fortune 500: 13.3%P/C Insurance: 9.0%

2019E* 15.0%

51

Professor Hartwig’sPresidential Insurance Quiz!

Q1: Since 1950, under which President was the US P/C insurance industry the most profitable (in terms of ROE)?

51

Q2: Since 1950, under which political party has the US P/C insurance industry been the most profitable, on average (in terms of ROE)?

15.10%8.93%

8.65%8.35%8.33%8.20%

7.98%7.68%

7.17%6.98%6.97%

5.43%5.03%

4.83%4.68%

4.43%3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

CarterReagan II

NixonClinton I

G.H.W. BushG.W. Bush II

Obama IIClinton IIReagan I

TrumpNixon/Ford

TrumanEisenhower IEisenhower II

G.W. Bush IObama I

JohnsonKennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: University of South Carolina, Risk and Uncertainty Management Center.

OVERALL RECORD: 1950-2019*

Democrats 7.61%Republicans 7.75%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950-2019*

P/C Insurance Industry Combined Ratio, 2001–2019E*

53

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. **Actual through Q3 2019 was 97.8Sources: A.M. Best, ISO (2014-2019).

95.7

99.3101.1

106.5

102.5

96.4 97.097.8

100.798.0

103.7

99.2101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19**

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premiums Relatively

Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

Cyclical Deterioration

Sharply higher CATs are driving

large underwriting losses and

pricing pressure

2019 Combined Ratio Est.98.0

54

Questions?

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email

me at robert.hartwig@moore.sc.edu or Download at www.uscriskcenter.com

55