What’s Keeping Insurance CEOs Awake at Night?

Trends, Challenges & Opportunities Alabama I-Day Tuscaloosa, AL

October 14, 2015 Download at www.iii.org/presentations

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

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

2

Insurance Industry Financial Performance

2014 Was a Reasonably Good Year 2015: A Repeat of 2014?

2

P/C Industry Net Income After Taxes 1991–2015:H1 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015:H1 ROAS = 9.2%

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

$14,

178

$5,8

40$1

9,31

6

$10,

870

$20,

598

$24,

404 $3

6,81

9$3

0,77

3

$21,

865

$3,0

46$3

0,02

9

$62,

496

$3,0

43

$35,

204

$19,

456 $3

3,52

2$6

3,78

4

$55,

501

$30,

972

$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:H

1

Net income fell modestly

(-12.5%) in 2014 vs. 2013

$ Millions

5

ROE: Property/Casualty Insurance by Major Event, 1987–2015E

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Modestly higher CATs

7

P/C Insurance Industry Combined Ratio, 2001–2015:H1*

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

95.7

99.3100.8

106.3

102.4

96.7 97.2 97.6

101.0

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:H1

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

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE

* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014 combined ratio including M&FG insurers is 97.0; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.

Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5100.6 100.1 100.8

92.7

101.299.5

101.0

96.7 97.2 97.6

102.4

106.5

95.7

14.3%15.9%

12.7%10.9%

7.4% 7.9%

4.7%6.2% 9.2%8.2%

9.6%8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015:H10%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

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

10% in 2005 and 16% in 1979

Lower CATs helped ROEs in 2013-15:Q2

9

Return on Equity by Financial Services Sector vs. Fortune 500, 2004-2014*

*GAAP basis. Sources: ISO, Fortune; Insurance Information Institute.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

04 05 06 07 08 09 10 11 12 13 14

Fortune 500 P/C Insurers Life Insurers Commercial Banks(Percent)

Average: 2004 - 2014 Fortune 500: 13.9%

Commercial Banks: 9.8% Life: 8.2% P/C: 7.1%

Banks and Insurers Have Substantially Underperformed the Fortune 500 Since the Financial Crisis

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

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

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

Economic Shocks, Inflation:

1976: 22.0%

Tort Crisis 1985/86: 22.2%

Post-9/11 2002:15.3%

Twin Recessions; Interest Rate

Hikes 1987: 3.7% Great

Recession:2010: -4.9%

ROE

2015E 4.1%

NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015E

Great Depression 1932: -15.9% max drop

Post WW II Peak: 1947: 26.2%

Start of WW II 1941: 15.8%

1950-70: Extended period of stability in growth and

profitability. Low interest rates, low inflation, “Bureau” rate regulation all played a role

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

volatility, high interest rates, tort environment all played roles

1988-2000: Period of

inter-cycle stability

2010-20XX? Post-

recession period of

stable growth?

14

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

20.5

18.4

14.6

14.3

13.4

13.3

12.3

12.1

12.0

12.0

11.7

11.4

11.1

11.1

10.9

10.8

10.7

10.7

10.5

10.5

10.3

9.9

9.8

9.8

9.6

9.5

02468

1012141618202224

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

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

Source: NAIC; Insurance Information Institute.

Profitability Benchmark: All P/C US: 7.9%

15

9.2

8.6

8.4

8.3

8.2

8.2

8.1

8.0

7.9

7.7

7.7

7.5

7.4

6.8

6.6

6.4

6.1

5.7

5.3

5.2

5.0

4.3

2.5

1.9

-6.9

-9.3

-14-12-10-8-6-4-202468

10

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

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

Source: NAIC; Insurance Information Institute.

Some of the least profitable states over the past decade

were hit hard by catastrophes, including Alabama

INVESTMENTS: THE NEW REALITY

17

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

17

Property/Casualty Insurance Industry Investment Income: 2000–2015E1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3$46.2 $46.8

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E

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

1 Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q2. Sources: ISO; Insurance Information Institute.

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

20

U.S. Treasury Security Yields: A Long Downward Trend, 1990–2015*

*Monthly, constant maturity, nominal rates, through August 2015. 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

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full 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.

U.S. Treasury yields plunged to historic lows in 2013. Longer-

term yields rebounded then sank fell again.

20

23

Interest Rate Forecasts: 2015 – 2021

3.1%

2.2%

2.7%

3.4%3.8%

4.0% 4.0% 4.0%

0.1%

0.8%

2.0%

2.8%3.1% 3.1%

0%

1%

2%

3%

4%

5%

15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F

A full normalization of interest rates is unlikely until the 2020s, more than a decade after the onset of the financial crisis.

Yield (%)

Sources: Blue Chip Economic Indicators (10/15 for 2015 and 2016; for 2017-2021 10/15 issue); Insurance Info. Institute.

3-Month Treasury 10-Year Treasury

The end of the Fed’s QE program in 2014 and a

stronger economy have yet to push longer-term

yields much higher

25

-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%

Person

al Lin

es

Pvt Pas

s Auto

Pers Prop

Commerc

ial

Comml A

uto

Credit

Comm Prop

Comm C

as

Fidelity

/Surety

Warran

ty

Surplus

Line

s

Med M

al

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

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

25

30

Profitability and Growth in Alabama P/C Insurance

Markets

Analysis by Line and Nearby State Comparisons

31

RNW All Lines: AL vs. U.S., 2004-2013

Sources: NAIC.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

04 05 06 07 08 09 10 11 12 13

US All Lines AL All Lines

P/C Insurer profitability in AL is below that of the US

overall over the past decade US: 7.9% AL: 2.5%

(Percent)

2004/05 hurricanes

Tuscaloosa tornado

32

RNW PP Auto: AL vs. U.S., 2004-2013

Sources: NAIC.

0%

2%

4%

6%

8%

10%

12%

14%

04 05 06 07 08 09 10 11 12 13

US PP Auto AL PP Auto

Average 2004-2013 US: 7.1% AL: 7.6%

Tuscaloosa tornados

Katrina and other storms

33

RNW Comm. Auto: AL vs. U.S., 2004-2013

Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

04 05 06 07 08 09 10 11 12 13

US Comm Auto AL Comm Auto

(Percent) Commercial Auto

profitability in AL is generally below the

US average

Average 2004-2013 US: 9.2% AL: 3.7%

Katrina and other storms

34

RNW Comm. Multi-Peril: AL vs. U.S., 2004-2013

Sources: NAIC.

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

04 05 06 07 08 09 10 11 12 13

US Comm M-P AL Comm M-P

(Percent)

Average 2004-2013 US: 8.9% AL: -1.6% Tuscaloosa

tornados Katrina and

other storms in 2004/05

35

RNW Homeowners: AL vs. U.S., 2004-2013

Sources: NAIC.

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

04 05 06 07 08 09 10 11 12 13

US HO AL HO

(Percent)

Average 2004-2013 US: 6.6%

AL: -13.1% Tuscaloosa

tornados Katrina and other storms

in 2004/05

36

RNW Workers Comp: AL vs. U.S., 2004-2013

Sources: NAIC.

0%

2%

4%

6%

8%

10%

12%

04 05 06 07 08 09 10 11 12 13

US WComp AL Wcomp

(Percent)

Average 2004-2013 US: 7.1% AL: 7.9%

All Lines: 10-Year Average RNW AL & Nearby States

2.5%

6.4%

7.9%

8.6%

-6.9%

5.3%

-10% -5% 0% 5% 10%

Florida

U.S.

Tennessee

Georgia

Alabama

Mississippi

Source: NAIC, Insurance Information Institute

2004-2013

Alabama All Lines profitability is below the

US and the regional average

PP Auto: 10-Year Average RNW AL & Nearby States

4.5%

6.2%

7.1%

7.6%

4.4%

5.8%

0% 2% 4% 6% 8%

Alabama

U.S.

Tennessee

Georgia

Mississippi

Florida

Source: NAIC, Insurance Information Institute

2004-2013

Alabama PP Auto profitability is above the US and regional

average

Comm. Auto: 10-Year Average RNW AL & Nearby States

4.7%

6.4%

9.0%

9.2%

3.7%

5.7%

0% 2% 4% 6% 8% 10%

U.S.

Tennessee

Georgia

Mississippi

Florida

Alabama

Source: NAIC, Insurance Information Institute

2004-2013

Alabama Commercial Auto profitability is below the US and regional average

Comm. M-P: 10-Year Average RNW AL & Nearby States

-1.6%

5.7%

7.4%

8.9%

-6.4%

5.0%

-10% -5% 0% 5% 10%

U.S.

Florida

Tennessee

Georgia

Alabama

Mississippi

Source: NAIC, Insurance Information Institute

2004-2013

Alabama Commercial Multi-Peril profitability

is below the US average and below the

regional average

Homeowners: 10-Year Average RNW AL & Nearby States

-13.1%

-8.2%

-0.4%

6.6%

-25.8%

-10.2%

-30% -20% -10% 0% 10%

U.S.

Florida

Georgia

Tennessee

Alabama

Mississippi

Source: NAIC, Insurance Information Institute

2004-2013

Alabama Homeowners profitability is below the US average and below the regional average

43

Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2012 (1)

Rank Most

expensive states HO average

premium Rank Least

expensive states HO average

premium 1 Florida $2,084 1 Idaho $538

2 Louisiana 1,742 2 Oregon 567 3 Texas 1,661 3 Utah 580 4 Oklahoma 1,501 4 Wisconsin 631 5 Mississippi 1,314 5 Washington 648 6 Alabama 1,248 6 Nevada 674 7 Rhode Island 1,233 7 Delaware 678 8 Kansas 1,213 8 Arizona 691 9 Connecticut 1,160 9 Ohio 721

10 New York 1,158 10 Maine 741 (1) Includes policies written by Citizens Property Insurance Corp. (Florida) and Citizens Property Insurance Corp. (Louisiana), Alabama Insurance

Underwriting Association, Mississippi Windstorm Underwriting Association, North Carolina Joint Underwriting Association and South Carolina Wind and Hail Underwriting Association. Other southeastern states have wind pools in operation and their data may not be included in this chart. 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.

(2) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. In addition, due to the Texas Windstorm Association (which writes wind-only policies) classifying HO-1, 2 and 5 premiums as HO-3, the average premium for homeowners insurance is artificially high.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank state average expenditures and does not endorse any conclusions drawn from this data. Source: ©2014 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

Alabama ranked as the 6th most expensive state for homeowners insurance in 2012, with an average expenditure of $1,248.

Workers Comp: 10-Year Average RNW AL & Nearby States

7.1%

7.3%

7.9%

10.5%

4.6%

7.3%

0% 2% 4% 6% 8% 10% 12%

Florida

Alabama

Mississippi

Tennessee

U.S.

Georgia

Source: NAIC, Insurance Information Institute

2004-2013

Alabama Workers Comp profitability is

above the US average and above the regional

average

45

All Lines DWP Growth: AL vs. U.S., 2005-2014

Source: SNL Financial.

2.3%

3.4%

0.5%

-2.1

%

-3.3

%

0.0%

3.7% 4.

6% 5.5%

4.4%

4.5%

5.8%

1.5%

-0.3

%

-3.6

%

-0.2

%

3.1% 4.

0%

6.2%

2.7%

-6%

-4%

-2%

0%

2%

4%

6%

8%

05 06 07 08 09 10 11 12 13 14US DWP: All Lines AL DWP: All Lines

(Percent) Average 2005-2014

US: 1.9% AL: 2.4%

46

Comm. Lines DWP Growth: AL vs. U.S., 2005-2014

Source: SNL Financial.

2.6%

4.6%

-0.1

%

-4.0

%

-7.3

%

-2.5

%

5.1%

5.1% 6.

1%

4.3%5.

0%

8.0%

-0.3

%

-3.0

%

-7.4

%

-3.3

%

2.3%

4.2% 5.

2%

1.2%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

05 06 07 08 09 10 11 12 13 14US DWP: Comm. Lines AL DWP: Comm. Lines

(Percent)

Average 2005-2014 US: 1.4% AL: 1.2%

47

Personal Lines DWP Growth: AL vs. U.S., 2005-2014

Source: SNL Financial.

2.2% 2.3%

1.2%

-0.1

%

1.1%

2.5%

2.2%

4.2%

5.1%

4.8%

4.0% 4.2%

3.1%

2.2%

-0.2

%

2.6%

2.6%

4.0%

6.8%

4.1%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

05 06 07 08 09 10 11 12 13 14US DWP: Pers. Lines AL DWP: Pers. Lines

(Percent)

Average 2005-2014 US: 2.6% AL: 3.3%

48

Private Passenger Auto DWP Growth: AL vs. U.S., 2005-2014

Source: SNL Financial.

0.5%

0.4%

0.0%

-0.3

%

-0.1

%

1.5%

1.5%

3.5%

4.6% 4.9%

1.6% 2.

6%

1.6%

0.1%

-1.8

%

0.9%

0.8%

2.6%

7.6%

4.5%

-4%

-2%

0%

2%

4%

6%

8%

10%

05 06 07 08 09 10 11 12 13 14US DWP: PP Auto AL DWP: PP Auto

(Percent)

Average 2005-2014 US: 1.6% AL: 2.1%

49

Homeowner’s MP DWP Growth: AL vs. U.S., 2005-2014

Source: SNL Financial.

7.4%

7.4%

4.2%

0.5%

3.8%

4.9%

3.8%

5.7% 6.

2%

4.4%

9.6%

7.4%

6.2% 6.4%

2.9%

5.3% 5.5% 5.8%

5.8%

3.6%

0%

2%

4%

6%

8%

10%

12%

05 06 07 08 09 10 11 12 13 14US DWP: HO Lines AL DWP: HO Lines

(Percent)

Average 2005-2014 US: 4.8% AL: 5.9%

CAPITAL/CAPACITY

50

Capital Accumulation Has Multiple Impacts

50

51

Policyholder Surplus, 2006:Q4–2015:Q2

Sources: ISO, A.M .Best.

($ Billions) $4

87.1

$496

.6

$512

.8

$521

.8

$478

.5

$455

.6

$437

.1 $463

.0 $490

.8 $511

.5 $540

.7

$530

.5

$544

.8

$559

.2

$559

.1

$538

.6

$550

.3 $567

.8

$583

.5

$586

.9 $607

.7

$614

.0

$624

.4 $653

.4 $671

.6

$673

.9

$674

.7

$672

.4

$662

.0

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

14:Q

3

14:Q

4

15:Q

2

2007:Q3 Pre-Crisis Peak

Surplus as of 6/30/15 stood at a near-record high $672.4B

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

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

Drop due to near-record 2011 CAT losses

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

56

Alternative Capital

56

New Investors Continue to Change the Reinsurance Landscape

First I.I.I. White Paper on Issue Was

Released in March 2015

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

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

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

2008.

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

Alternative Capital as a Percentage of Traditional Global Reinsurance Capital

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

4.6% 5.7% 5.9% 5.8% 5.4%

6.5%

8.4%

10.2%

11.5%

0%

2%

4%

6%

8%

10%

12%

2006 2007 2008 2009 2010 2011 2012 2013 2014

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

Catastrophe Bond Issuance and Outstanding: 1997-2015:Q2

94

8.2

87

4.2

1,0

62

.5

1,1

42

.0

96

6.9

98

9.5

1,9

88

.2

1,1

42

.8

1,4

99

.0

4,6

14

.7

7,1

87

.0

3,0

09

.9

3,3

96

.0

4,5

99

.9

4,1

07

.1

5,8

55

.3

7,0

83

.0

8,0

26

.7

3,8

42

.2

4,2

89

.0

5,0

85

.0

7,6

77

.0

13

,41

6.4

12

,53

8.6

12

,50

8.2

12

,19

5.7

12

,34

2.8

14

,83

9.3

18

,57

6.9

22

,86

7.8

21

,55

9.6

0

5,000

10,000

15,000

20,000

25,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*

New Issuance Outstanding

60

Risk Capital Amount ($ Millions)

Cat Bond Issuance Appears to Be Slowing Down in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction.

Source: Guy Carpenter.

65

Performance by Segment

65

Homeowners Insurance Combined Ratio: 1990–2015F

113.

011

7.7

158.

411

3.6

101.

0 109.

410

8.2

111.

4 121.

710

9.3

98.2

91.7 96

.485

.4 91.7

114.

510

3.1

103.

811

9.4

101.

487

.7 92.4 96

.6

118.

411

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 11 12 13 14F 15F

1

Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to

Local Catastrophe Loss Activity

66

Hurricane Ike

Hurricane Sandy

Record tornado activity

Hurricane Andrew

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

Private Passenger Auto Combined Ratio: 1993–2017F

101.

710

1.3

101.

310

1.0

109.

510

7.9

104.

298

.494

.395

.195

.5 98.3 10

0.2

101.

310

1.0

102.

010

2.1

101.

610

2.3

102.

210

2.3

102.

4

99.5 10

1.1

103.

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 11 12 13 14 15F 16F 17F

Private Passenger Auto Underwriitng Performance Is Exhibiting Remarkable Stability

67

Sources: A.M. Best (1990-2014); Conning (2015F – 2017F); Insurance Information Institute.

68

Collision Coverage: Severity & Frequency Trends Are Both Higher in 2015*

2.8%

1.3%

4.2%

1.6%

3.0%

-1.8%

-3.6%

2.5%

-2.4%-1.4%

4.2%

1.7%

3.9%3.1%

0.1% 0.5%

-2.3%

-0.1%

-1.4%-0.5%

0.9%

2.3%

-4%

-3%

-2%

-1%

0%1%

2%

3%

4%

5%

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

Severity Frequency

Annual Change, 2005 through 2015*

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

Evidence from Past Recoveries *2015 figure is for the 4 quarters ending with 2015:Q1. Source: ISO/PCI Fast Track data; Insurance Information Institute

109.

4

110.

211

8.8

109.

5 112.

5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

491

.1 93.6

104.

2

98.9

102.

4

107.

910

3.5

94.8

94.3

98.3 99

.2102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

125

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F

16F

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

*2007-2012 figures exclude mortgage and financial guaranty segments. Source: A.M. Best (1990-2014); Conning (2015-16F) Insurance Information Institute.

Commercial Lines Combined Ratio, 1990-2016F*

Commercial lines underwriting performance improved in 2013/14 but higher cats, diminishing prior year reserves and rising loss cost trends in some lines could push

combined ratios higher

69

98

Growth Analysis by State and Business Segment

Post-Crisis Paradox? Premium Growth Rates Vary

Tremendously by State

98

99

-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*

Net Premium Growth (All P/C Lines): Annual Change, 1971—2015:H1 (Percent)

1975-78 1984-87 2000-03

Shaded areas denote “hard market” periods Sources: A.M. Best (1971-2013), ISO (2014-15).

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

2015:H1: 4.1% 2014: 4.1% 2013: 4.4%

2012: +4.2%

100

Direct Premiums Written: Total P/C Percent Change by State, 2007-2014

70.7

36.7

36.2

30.3

29.4

26.8

24.7

23.7

21.6

20.7

19.2

19.2

18.6

18.1

18.0

17.0

15.2

15.1

15.0

14.9

14.8

14.7

14.4

14.2

13.8

13.5

0

10

20

30

40

50

60

70

80

ND

OK SD TX NE

KS IA VT WY

CO

MN IN MI

TN AR WI

GA

SC NJ

OH AK

KY VA LA CT

MT

Pece

nt c

hang

e (%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota was the country’s growth leader over the past 7 years with premiums written

expanding by 70.7%, fueled by the state’s energy boom

Growth Benchmarks: Total P/C US: 13.0%

101

Direct Premiums Written: Total P/C Percent Change by State, 2007-2014

13.4

13.1

13.1

13.0

13.0

12.9

12.4

12.2

11.7

11.0

10.5

9.4

9.4

9.2

9.1

8.2

6.3

6.0

4.7

2.2

1.3

-0.8

-1.6

-4.3

-7.3

-12.

9

-15

-10

-5

0

5

10

15

MO NY

UT

US

NM MS

MA AL

NC

MD

WA RI

NH IL PA ID ME CA

OR FL AZ

DC HI

WV

NV

DE

Pece

nt c

hang

e (%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 4 states and DC between

2007 and 2014

102

Direct Premiums Written: Comm. Lines Percent Change by State, 2007-2014

80.4

36.8

33.3

29.4

24.8

22.5

21.0

20.6

15.2

14.6

13.9

11.8

10.3

8.7

8.5

8.4

8.0

7.9

7.6

7.1

6.6

5.9

5.9

5.8

5.4

4.5

0102030405060708090

ND SD VT OK NE IA KS TX WY

AK IN MN WI

MA

AR

CT

NY NJ

CO

NM OH LA US

MS

NH

MO

Pece

nt c

hang

e (%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

43 states showed commercial lines growth from 2007

through 2014

Growth Benchmarks: Commercial US: 5.9%

103

Direct Premiums Written: Comm. Lines Percent Change by State, 2007-2014

4.5

4.4

4.2

4.1

3.9

3.8

3.7

3.3

3.3

3.2

3.1

2.8

2.8

2.2

2.1

1.4

0.9

-1.3

-3.2

-5.3

-6.5

-6.9

-9.2

-10.

7

-19.

9

-22.

2

-25

-20

-15

-10

-5

0

5

10

MI

TN MD

MT CA RI

WA

GA PA UT IL KY VA NC

ME

SC ID AL

DC HI

FL OR AZ

DE NV

WV

Pece

nt c

hang

e (%

)

Bottom 25 States

Sources: SNL Financial LLC.; Insurance Information Institute.

Alabama DPW growth has been

sluggish

Nearly half the states have yet to see commercial lines premium

volume return to pre-crisis levels

106

Pricing Trends

Survey Results Suggest Commercial Pricing Has

Flattened Out but Personal Lines Are Up

106

107

Monthly Change in Auto Insurance Prices, 1991–2015*

*Percentage change from same month in prior year; through July 2015; seasonally adjusted Note: 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 '12 '13 '14 '15

Cyclical peaks in PP Auto tend to occur roughly every 10 years (early

1990s, early 2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in late

2010 at 5.3%, falling to 2.8% by Mar. 2012

July 2015 reading of 5.4% is up from 4.2%

a year earlier

109

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

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Percentage Change (%)

Peak = 2001:Q4 +28.5%

KRW : No Lasting Impact

Pricing turned positive in

Q3:2011, the first increase in nearly 8 years

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Rate trends are roughly flat, some carriers

reporting small gains, others flat, others small

declines

M&A UPDATE: A PATH TO GROWTH?

112

Are Capital Accumulation, Drive for Growth and Scale Stimulating

M&A Activity?

112

113

U.S. INSURANCE MERGERS AND ACQUISITIONS, P/C SECTOR, 1994-2014 (1)

$5,1

00

$11,

534

$8,0

59

$30,

873

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64

$35,

221

$13,

615

$16,

294

$3,5

07 $6,4

19

$12,

458

$4,6

51

$4,3

97

$6,7

23

$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

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 was up sharply in 2014 but remains well

below pre-crisis or late 1990s levels.

M&A activity in 2015 will

likely reach its highest level since 1998

117

Insured Catastrophe Losses

2013/14 and YTD 2015 Experienced Below Average CAT Activity After Very High CAT

Losses in 2011/12 Winter Storm Losses Far Above Average in

2014 and 2015

117

118

$13.

0$1

1.3

$3.9

$14.

8$1

1.9

$6.3

$35.

8$7

.8 $16.

8$3

4.7

$10.

9$7

.7$3

0.1

$11.

8$1

4.9

$34.

6$3

6.1

$13.

1$1

5.5

$11.

0

$75.7

$14.

4$5

.0 $8.2

$38.

9$9

.1$2

7.2

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*

U.S. Insured Catastrophe Losses

*Through 9/30/15 in 2015 dollars. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

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

more—not fewer—Costly Events

2012 was the 3rd most expensive year ever for

insured CAT losses

$11.0B in insured CAT losses though

9/30/15

($ Billions, $ 2014)

118

US Insured CAT Losses Through Q3to Date: 30 Events =$11 Billion in Claims

Source: PCS; Insurance information Institute.

Top 10 Insured CAT Losses Through 2015 Q3: 30 Events = $11 Bill. in Claims

Source: PCS; Insurance information Institute.

Loss Events in the US, 1980 – 2014 Overall and Insured Losses

122

Overall losses (in 2013 values)*

Insured losses (in 2013 values)*

*Losses adjusted to inflation based on CPI.

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

50

100

150

200

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

Source: Property Claim Services, MR NatCatSERVICE.

$ Billions 2015 First Half: $8.2 Billion Insured Losses

$12.0 Overall Losses

123

Number of National Flood Insurance Program Policies in Force at Year-End, 1980-2015*

Source: National Flood Insurance Program. * As of July, 2015

2.10

4

2.01

7 2.47

8

3.47

7

4.36

9 4.96

2 5.65

6

5.68

4

5.70

0

5.64

5

5.64

6

5.62

0

5.56

9

5.35

1

5.15

1

0

1

2

3

4

5

6

1980 1985 1990 1995 2000 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015*

(mill

ions

)

The number of NFIP policies in force has

plunged by 549,000 or 9.6% since 2009, even

as coastal development surges and sea levels rise

124

10% 14%

40%52%

62%

87% 95% 99%

0%10%20%30%40%50%60%70%80%90%

100%

CAEarthquake

Flood Renters Cyber Terrorism Pvt.Passenger

Auto

Home WorkersComp

Sources: CA Earthquake (WSJ, http://www.wsj.com/articles/california-pushes-homeowners-to-insure-against-earthquakes-1440980138 ); Flood and Renters (I.I.I. June 2015 Pulse Survey); Cyber (Advisen, 2015); Terrorism (Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014; data for 2013); Pvt. Passenger Auto (Insurance Research Council, Uninsured Motorists, 2014 Edition, data for 2012); Home and Workers Comp (I.I.I. estimates); Insurance Information Institute research.

Take-Up Rates for Various Types of Insurance in the U.S.

Take-Up Rate

Take-up rates vary widely by type of coverage

125

Top 16 Most Costly Disasters in U.S. History—Katrina Still Ranks #1

(Insured Losses, 2014 Dollars, $ Billions)

$8.1 $9.0 $9.4 $11.4$13.8$19.3

$24.6 $25.3$26.4

$50.2

$7.7$7.3$6.9$5.8$5.7$4.6

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Storm Sandy in 2012 was the last mega-CAT

to hit the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have Occurred Since 2004

Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI.

127

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995–20141

0.1%

1.5%5.4%

0.1%6.2%

6.8%

39.2%

40.7%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2014 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $161.2

Fires (4), $6.0

Events Involving Tornadoes (2), $154.9

Winter Storms, $26.9

Terrorism, $24.5

Geological Events, $0.5

Wind/Hail/Flood (3), $21.4

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1995-2014

totaled $395.6B, an average of $19.8B per year or $1.65B

per month

Winter storm losses were much above average in 2014/15 are

will push this share up

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

136

$ Billions

Analysis contains: severe storm, tornado, hail, flash flood and lightning

10

20

30

40

50

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

*Losses adjusted to inflation based on CPI

Source: Geo Risks Research, NatCatSERVICE

Overall losses (in 2014 values)*

Insured losses (in 2014 values)* The period from 2008-2014 has

been the most expensive on record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail,

lightning and flash flood)

2015 First Half: $5.1 Billion Insured Losses

$7.0 Overall Losses

137

Federal Disaster Declarations Patterns:

1953-2015

137

Disaster Declarations Set New Records in Recent Years

Number of Federal Major Disaster Declarations, 1953-2015*

1317 18 16 16

7 712 12

22 2025 25

11 1119

2917 17

48 46 4638

3022 25

4223

1524 21

3427 28

2311

3138

4532

3632

7544

6550

45 4549

5669

4852

6375

5981

9947

6245

36

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 12 13 14 15*

*Through October 3, 2015. Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Generally Rising and Set New Records in 2010 and 2011 Before Dropping in 2012-2014

The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s

record 81 declarations.

There have been 2,239 federal disaster

declarations since 1953. The average

number of declarations per year is 36 from

1953-2014, though there haven’t been that few recorded since 1995.

36 federal disasters have declared so far in 2015*

138

139

Federal Disasters Declarations by State, 1953 – 2015: Highest 25 States*

89

81

76

69 67

61 61 58 57 56 56 56 54 54 53 52 51 51 50 49 47 47 45 44 41

0102030405060708090

100

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

Dis

aste

r Dec

lara

tions

Over the past 60 years, Alabama has had the 8th

highest number of Federal Disaster Declarations

*Through Oct. 3, 2015. Includes Puerto Rico and the District of Columbia. Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

140

Federal Disasters Declarations by State, 1953 – 2015: Lowest 25 States*

43

40 40 39 39

37 36

34

30 29 28 28 27 26 25 25 24 23 23

20

17 17

15

13 12 11 10

0

10

20

30

40

50

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

Dis

aste

r Dec

lara

tions

Over the past 60 years, Wyoming and Utah had

the fewest number of Federal Disaster

Declarations

*Through Oct. 3, 2015. Includes Puerto Rico and the District of Columbia. Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

143

Growth Will Expand Insurer Exposure Base Across Most Lines

143

144

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 10/15; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-0.9

%4.

6%4.

3%2.

1%0.

6%3.

9%2.

1% 2.7%

2.6%

2.7%

2.6%

2.6%

-8.9%

4.5%

1.4%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

08:1

Q08

:2Q

08:3

Q08

:4Q

09:1

Q09

:2Q

09:3

Q09

:4Q

10:1

Q10

:2Q

10:3

Q10

:4Q

11:1

Q11

:2Q

11:3

Q11

:4Q

12:1

Q12

:2Q

12:3

Q12

:4Q

13:1

Q13

:2Q

13:3

Q13

:4Q

14:1

Q14

:2Q

14:3

Q14

:4Q

15:1

Q15

:2Q

15:3

Q15

:4Q

16:1

Q16

:2Q

16:3

Q16

:4Q

Demand for Insurance Should Increase in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in in June

2009

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

Q1 2014/15 GDP data were hit hard by this year’s “Polar Vortex”

and harsh winter

146

Real GDP by State Percent Change, 2014*: Highest 25 States

6.3

5.2

5.1

5.1

4.7

3.6

3.1

3.0

2.8

2.8

2.7

2.7

2.5

2.3

2.3

2.3

2.2

2.2

2.1

1.9

1.9

1.9

1.8

1.8

1.8

1.7

0

1

2

3

4

5

6

7

ND TX WY WV CO OR UT WA OK CA ID FL NY GA NH MA US SC OH MI MN LA MT KS PA TN

Perc

ent C

hang

e (%

)

*Advance statistics Sources: U.S. Bureau of Economic Analysis; Insurance Information Institute.

North Dakota was the economic growth juggernaut of the US

in 2014—by far

Only 7 states experienced growth in excess of 3% in 2014, which is a

growth rate we would see nationally in a more typical recovery

Growth Benchmarks: Real GDP US: 2.2%

147

1.6

1.4

1.4

1.2

1.2

1.2

1.0

1.0

1.0

1.0

0.9

0.8

0.8

0.8

0.7

0.7

0.6

0.6

0.6

0.4

0.4

0.4

0.2

0.0

-1.2

-1.3-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

DC NC AZ IL RI DE WI KY NM NV MO AR HI MD NE AL SD VT CT IA IN NJ ME VA MS AK

Perc

ent C

hang

e (%

)Real GDP by State Percent Change, 2014*: Lowest 25 States

*Advance statistics Sources: US Bureau of Economic Analysis; Insurance Information Institute.

Mississippi and Alaska were the

only states to shrink in 2014

Growth rates in 16 states were still below 1% in 2014, including in AL

149

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend Has Greatly Improved

149

150

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Jan15

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 5.1% in Sep. 2015. 4.5% to

5.5% is “normal.”

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

January 2000 through September 2015, Seasonally Adjusted (%)

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is continuing to improve.

150

U-6 soared from 8.0% in March

2007 to 17.5% in October 2009; Stood at 10.0% in Sept. 2015. 8% to 10% is

“normal.”

152

US Unemployment Rate Forecast 4.

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%

4.8%

4.8%

4.7%

9.6%

4%

5%

6%

7%

8%

9%

10%

11%

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

16:Q

116

:Q2

16:Q

316

:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

* = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/15 edition); Insurance Information Institute.

2007:Q1 to 2016:Q4F*

Unemployment forecasts have been revised modestly

downwards. Optimistic scenarios put the

unemployment as low as 5.0% by Q4 of 2015.

Jobless figures have been revised

downwards for 2015/16

153

Unemployment Rates by State, August 2015: Highest 25 States*

7.6

6.8

6.8

6.7

6.6

6.3

6.3

6.2

6.1

6.1

6.0

6.0

5.9

5.9

5.7

5.7

5.6

5.6

5.6

5.4

5.4

5.3

5.3

5.3

5.2

5.2

0

2

4

6

8

WV DC NV NM AK AZ MS AL CA OR LA SC GA NC NJ TN IL MO RI AR PA CT FL WA KY NY

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for August 2015, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In August, 29 states had over-the-month unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change.

154

5.1

5.1

5.1

4.9

4.7

4.7

4.6

4.6

4.6

4.5

4.5

4.5

4.2

4.2

4.1

4.1

4.0

4.0

3.7

3.7

3.7

3.6

3.6

3.5

2.9

2.8

0

1

2

3

4

5

6

MD MI US DE MA OH IN KS OK ME VA WI CO ID MT TX MN WY IA SD UT NH VT HI ND NE

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, August 2015: Lowest 25 States*

*Provisional figures for August 2015, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In August, 29 states had over-the-month unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change.

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

155

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

155

156

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

Billions of Dollars

$0$100$200$300$400$500$600$700$800$900

$1,000

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

Non ResidentialResidential

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

$298.1

$15.0 $613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2015: Value of new pvt. construction hits $787.8B as of

July 2015, up 57.4% from the 2010 trough but still 13.6% below

2006 peak

156

$261.8

$238.8

$407.0

$380.8

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

161

Construction Employment, Jan. 2010—Sept. 2015*

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

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

55,

478

5,48

55,

497

5,52

45,

530

5,54

75,

546

5,58

35,

576

5,57

75,

612

5,62

95,

629

5,62

85,

627

5,60

85,

623

5,63

25,

641

5,64

95,

668

5,68

45,

724

5,74

6 5,79

85,

815

5,81

35,

833

5,85

65,

854

5,86

65,

893

5,91

85,

953

5,93

7 6,00

66,

032

6,06

26,

103

6,11

46,

121

6,15

26,

169

6,19

16,

201

6,23

16,

275

6,31

66,

347

6,33

56,

365

6,37

76,

378

6,38

36,

388

6,39

6

5,400

5,500

5,600

5,700

5,800

5,900

6,000

6,100

6,200

6,300

6,400

6,500

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

0M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Construction employment is +948,000 above

Jan. 2011 (+17.4%) trough

(Thousands)

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

162

(Millions of Units)

New Private Housing Starts, 1990-2021F

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 0.61

0.78 0.

921.

10 1.13 1.

28 1.42 1.47

1.47 1.50

1.50

1.351.

461.

291.

201.

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 15F 16F 17F 18F 19F20F 21F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/15); Insurance Information Institute.

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

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

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

annual decline of 1.49 million units, lowest since records began

in 1959

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

for several more years

165

I.I.I. Poll: Renter’s Insurance

Source: Insurance Information Institute Annual Pulse Survey.

29% 31% 35% 37%

40%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013 2014 2015

The Percentage of Renters Who Have Renters Insurance Has Been Rising Since 2011.

Q. Do you have renters insurance? 1

1Asked of those who rent their home.

Americans are increasingly choosing to rent, but are slow to understand the

need to insure, exacerbating the underinsurance gap

ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT

BUT VOLATILE

168

US Is Becoming an Energy Powerhouse but Fall in Prices

Will Have Negative Impact

168

5.19 5.08 5.00 5.35 5.47 5.656.49

7.44

8.679.31 9.53

5.09

0

2

4

6

8

10

12

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015F

2016F

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

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

Millions of Barrels per Day

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

Saudi Arabia as the world’s largest oil producer

171

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

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

156.

7 15

7.6

158.

7 15

8.1

158.

4 15

9.7

160.

2 16

1.5

161.

4 16

1.0

162.

7 16

4.3

166.

6 16

9.2

170.

1 17

1.2

172.

6 17

4.0

176.

6 17

8.2

178.

7 18

0.6

181.

3 18

2.3

184.

7 18

5.2

186.

2 18

7.8

188.

6 18

9.3

189.

4 18

9.4

190.

5 19

2.2

193.

1 19

4.6

194.

0 19

3.8

193.

1 19

2.5

193.

0 19

3.4

193.

3 19

3.1

194.

0 19

4.0

194.

0 19

5.4

193.

7 19

4.6

196.

4 19

7.6

198.

6 19

8.4

199.

4 20

1.5

201.

0 20

1.2

199.

4 19

7.6

197.

7 19

4.4

194.

2 19

3.2

193.

6 19

2.1

191.

0

150

160

170

180

190

200

210

Mar

-10

May

-10

Jul-1

0S

ep-1

0N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1S

ep-1

1N

ov-1

1Ja

n-12

Mar

-12

May

-12

Jul-1

2S

ep-1

2N

ov-1

2Ja

n-13

Mar

-13

May

-13

Jul-1

3S

ep-1

3N

ov-1

3Ja

n-14

Mar

-14

May

-14

Jul-1

4S

ep-1

4N

ov-1

4Ja

n-15

Mar

-15

May

-15

Jul-1

5S

ep-1

5

Oil and gas extraction employment was up

28.8% by Oct. 2014 but falling energy prices have taken their toll

(000)

Employment in the O&G segment is down 5.2%

since its Oct. 2014 peak

MANUFACTURING SECTOR OVERVIEW & OUTLOOK

172

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

Markets and Strong Dollar Hurt

172

176

Manufacturing Employment, Jan. 2010—Sept. 2015*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

3411

,857

11,8

9911

,916

11,9

3011

,941

11,9

6511

,961

11,9

4811

,951

11,9

4711

,961

11,9

8012

,002

12,0

0612

,006

12,0

0712

,005

11,9

8312

,011

12,0

2212

,040

12,0

7212

,086

12,1

0212

,122

12,1

3112

,142

12,1

5412

,177

12,1

9112

,205

12,2

1412

,237 12,2

8212

,301

12,3

1812

,321

12,3

2712

,327

12,3

3312

,334

12,3

4512

,327

12,3

18

11,250

11,500

11,750

12,000

12,250

12,500Ja

n-10

Feb-

10M

ar-1

0Ap

r-10

May

-10

Jun-

10Ju

l-10

Aug-

10Se

p-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr-1

1M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

2/30

/2M

ar-1

2Ap

r-12

May

-12

Jun-

12Ju

l-12

Aug-

12Se

p-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr-1

3M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14M

ar-1

4Ap

r-14

May

-14

Jun-

14Ju

l-14

Aug-

14Se

p-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15Fe

b-15

Mar

-15

Apr-1

5M

ay-1

5Ju

n-15

Jul-1

5Au

g-15

Sep-

15

Manufacturing employment has been a surprising source of strength in the economy. Employment was at a multi-year high until recently.

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

(Thousands) Since Jan 2010, manufacturing employment is up (+858,000 or +7.5%) but has slipped in recent months as economies abroad weaken, hurting

exports of manufactured goods

Profitability & Politics

181

181

How Is Profitability Affected by the President’s Political Party?

15.10%9.00%8.93%

8.65%8.35%8.33%

7.98%7.68%

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 IIObama II

NixonClinton I

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

Clinton IIReagan I

Nixon/FordTruman

Eisenhower IEisenhower II

G.W. Bush IObama I

JohnsonKennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52;. Source: Insurance Information Institute

OVERALL RECORD: 1950-2014*

Democrats 7.72% Republicans 7.85%

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

P/C Insurance Industry ROE by Presidential Administration, 1950-2014*

-5%

0%

5%

10%

15%

20%

25%

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

BLUE = Democratic President RED = Republican President Tr

uman

Nixon/Ford

Ken

nedy

/ Jo

hnso

n

Eise

nhow

er

Car

ter

Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014

Obama

. Source: Insurance Information Institute

CYBER RISK & CYBER INSURANCE

184

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and

Small in Every Industry

184

Data Breaches 2005-2015, by Number of Breaches and Records Exposed # Data Breaches/Millions of Records Exposed

*Figures as of June 30, 2015, from the Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf

157

321

446

656

498

419470

614

400

783

662

117.6

85.692.0

17.522.935.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *2015020406080100120140160180200220

# Data Breaches # Records Exposed (Millions)

The total number of data breaches (+27.5%) hit a record high of 783 in 2014, exposing 85.6 million records. Through June 30, this year has

seen 117.6 million records exposed in 400 breaches.*

Millions

191

Main Causes of Data Breach Globally

30%

29%

42%

*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection. Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014

Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30

percent concern a negligent employee or contractor (human factor).

Malicious or criminal attack*

Human error

System glitch

193

US: External Cyber Crime Costs: Fiscal Year 2014

2%2%

18%

38%

40%

* Other costs include direct and indirect costs that could not be allocated to a main external cost category Source: 2014 Cost of Cyber Crime: United States, Ponemon Institute.

Information theft (40%) and business disruption or lost productivity (38%) account for the majority of external costs due to cyber crime.

Information theft

Equipment damages Other costs*

Revenue loss

Business disruption

Data/Privacy Breach: Many Potential Costs Can Be Insured

Source: Zurich Insurance; Insurance Information Institute

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

194

196

I.I.I. Will Release its Third Cyber Report in 2015: Cyber Risks Threat and Opportunity

I.I.I.’s 3rd report on cyber risk scheduled for Q4 2015

Provides information on cyber threats and insurance market solutions

Global cyber risk overview

Quantification of threats by type and industry

Cyber security and cost of attacks

Cyber terrorism

Cyber liability

Insurance market for cyber risk

198

Marsh: Percentage of U.S. Companies Purchasing Cyber Insurance Increased in 2014

*Take-up rate refers to the overall percentage of clients that purchased standalone cyber insurance. Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015

8%

12%

18%

21%

21%

22%

26%

32%

50%

16%

11%

13%

14%

17%

17%

16%

22%

45%

13%

6%Manufacturing

Communications, Media and Tech

Retail/Wholesale

Power and Utilities

Financial Institutions

Services

Hospitality and Gaming

Education

Health Care

All Industries

Take-up rate 2014* Take-up rate 2013

Ever larger numbers of insureds seek financial

protection via cyber insurance. The

percentage of U.S. companies buying cyber

insurance rose to 16 percent in 2014.

199

Marsh: Total Limits Purchased, By Industry – Cyber Liability, All Revenue Size

Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015

$22.0

$4.2

$9.9 $10.5$9.5$11.1 $10.2

$13.2

$19.7

$6.7

$23.5

$10.5$12.0

$14.9

$21.0

$4.4

$22.2

$12.8

All Industries Comms, Media& Technology

Education FinancialInstitutions

Health Care Manufacturing Power andUtilities

Retail/Wholesale Services

Avg. 2013 Limits Avg. 2014 Limits

Average limits purchased for cyber risk rose to $12.8 million for all industries and all company sizes in 2014. Power and utility companies witnessed the sharpest

percentage increase in average limits, at 59 percent.

($ Millions)

202

INDUSTRY DISRUPTORS

Technology, Society and the Economy Are All

Changing at a Rapid Pace Thoughts on the Future

202

204

Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance

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

sales could be fully autonomous models

Source: Boston Consulting Group.

Questions

Are auto insurers monitoring these trends?

How are they reacting?

Will Google take over the industry?

Will the number of auto insurers shrink?

How will liability shift?

205

On-Demand/Sharing/Peer-to-Peer Economy Impacts Many Lines of Insurance The “On-Demand” Economy is or

will impact many segments of the economy important to P/C insurers Auto (personal and commercial)

Homeowners/Renters

Many Liability Coverages

Professional Liability

Workers Comp Many unanswered insurance

questions

Insurance solutions are increasingly available to fill the many insurance gaps that arise

206

A Few Thoughts on the Future of Auto Insurance Global auto insurance premiums written total about $600B ~80% personal, 20% commercial

US accounts for more than 1/3 of this total (about $210B in 2014)

Innovations in automobile safety will, over time, reduced claim frequency but severities could still rise as repair costs escalate Claim activity clearly not immune to economy

Frequency declines could lead price declines, aiding profitability More cars, not fewer will be on highways in the US, world Exposure (insured car years) grows even as frequency declines

Timeline for large numbers of mass produced autonomous vehicles on American highways is wildly optimistic Mid-2030s is more likely timeframe; Transition occurring through mid-century

Tech media is enamored with anything involving Google, Apple

Auto insurance will be the largest, most important of all P/C lines for many years to come

208

Send in the Drones: Potential Rapid Adoption in Industry; Media Loves It

Drones or Unmanned Aerial Vehicle (UAV) technology is seeing rapid adoption rate in many industries, including insurance

FAA granting Section 333 exemptions for commercial use and testing of UAS

At least 5 insurers have received permission to test

Wide variety of applications: claims, pre-event property inspections…

Insurers partnering with construction industry to guide R&D and regulation of UAV use via Property Drone Consortium: www.propertydrone.org

Shifting Legal Liability & Tort Environment

210

Will the Tort Pendulum Swing Against Insurers?

210

Business Leaders Ranking of Liability Systems in 2015

Best States 1. Delaware

2. Vermont

3. Nebraska

4. Iowa

5. New Hampshire

6. Idaho

7. North Carolina

8. Wyoming

9. South Dakota

10. Utah

Worst States 41. Arkansas

42. Missouri

43. Mississippi

44. Florida

45. New Mexico

46. Alabama

47. California

48. Illinois

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2015 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2015 Vermont New Hampshire North Carolina South Dakota

Drop-offs

Minnesota Kansas Virginia North Dakota

Newly Notorious

Arkansas Missouri

Rising Above

Oklahoma Montana

214

215

$750,392$653,898

$782,657

$1,045,048 $1,009,788

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

2009 2010 2011 2012 2013

Average Personal Injury Jury Award, 2009 – 2013

Average awards in Personal Injury cases

have increased by more than 1/3 in recent years

Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute.

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14%

16%

14% 14%

16%

13%

14%

14%

15%

15%

16%

16%

17%

2003-04 2005-06 2007-09 2010-11 2012-13

Percent of Personal Injury Jury Awards Over $1 Million, 2003 – 2013*

The share of $1MM+ jury awards has returned ot

its pre-crisis high

*Latest available. Source: Current Award Trends in Personal Injury, 53rd and 54th Editions; Insurance Information Institute.

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The Nation’s Judicial “Hellholes”: 2014/2015

Source: American Tort Reform Association; Insurance Information Institute

West Virginia Illinois Madison County

New York

City Asbestos Litigation

Watch List Atlantic County, New

Jersey Mississippi Delta Montana Nevada Newport News, Virginia Philadelphia,

Pennsylvania

Dishonorable Mention

AL Supreme Court PA Supreme Court

California

Florida

Volkswagen: Massive tort actions, fines, penalties certain. Are others vulnerable? Issue of cheating on

environmental standards and liability looms large.

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Insurance Information Institute Online:

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